Economists, businessmen cite Maharlika fund risks

ECONOMISTS and business executives representing several institutions reiterated their warnings against the creation of a government investment fund as it is “fundamentally flawed” and unable to attain the economic goals it has set out to accomplish.

While they welcomed the removal of the state pension funds from contributing to the proposed Maharlika Investment Fund (MIF), members of the Foundation for Economic Freedom, the Management Association of the Philippines and the University of the Philippines School of Economics Alumni Association said, requiring the Bangko Sentral ng Pilipinas (BSP) and government financial institutions (GFIS) to invest in the MIF instead, puts these institutions “and ultimately the national government (Ng)…in harm’s way.” The groups’ joint position paper dated January 26 was sent to all the senators as the chamber began discussions on Senate Bill 1670, a replica of House Bill 6608, which establishes the MIF.

SB1670 was authored by Senator Mark A. Villar whose Committee on Banks, Financial Institutions and Currencies held a public hearing on his proposed MIF Act. The hearing last Wednesday was held jointly with the Committees on Government Corporations and Public Enterprises, on Ways and Means and on Finance.

During the hearing, Senator Ana Theresia “Risa” N. Hontiveros read out the groups’ position paper and asked that they be invited in the next hearing on the bill. Several senators also pointed to recent news on the losses of Norway’s and Hong Kong’s sovereign wealth funds.

The groups pointed out that the provision regarding BSP’S remittance of 100 percent of its declared dividends in the first two years of the MIF and 50 percent in the succeeding years, “not only amends the BSP’S mandate to promote monetary stability by adding an earnings factor for the MIF in its key performance indicators, but also effectively deprives the BSP of its ability to strengthen itself from its earnings to manage liquidity and inflation, as well as help distressed financial institutions.”

At odds

THE groups added that the provision in the proposed MIF Act “compromises the BSP’S autonomy, independence and ability to deliver on its price and financial stability mandates.”

Under the law, the BSP is allowed to retain a portion of its dividends as the national government’s contribution to its recapitalization of P50 billion. In SB1670, after BSP has been fully capitalized, it is again mandated to remit 100 percent of its dividends to the MIF.

The groups’ position paper explained that the BSP imposes reserve requirements on banks, on which it may pay interest.

“Easing these requirements reduces the ‘income’ of the BSP and, by extension, its dividends, but it boosts the economy by lowering the costs of financial intermediation,” the position paper read. “The BSP’S monetary objectives could be at odds with the MIF’S need for funding through the BSP’S earnings and dividends.”

The groups added that the BSP also intervenes in the forex market, to create a more stable environment for companies.

“Such interventions can cause the BSP to gain or lose profits. Should the BSP’S forex stabilization efforts be tainted by pressure to maximize dividends for the MIF?”

Additional liabilities

IN the bid to reduce the risk of the GFIS’ exposure to the fund, the bill requires the NG to guarantee the security or debt instruments to be issued by the Maharlika Investment Corp. to the GFIS.

However, the groups said doing so will, instead, “create additional contingent liabilities for the national government at a time when there are serious concerns about the size of the government’s outstanding debt, contingent liabilities in infrastructure projects and pension funds and burgeoning unfunded liabilities in the retirement program for the armed forces. Managing our debt and contingent liabilities is critical to protecting our credit ratings.”

They warned that the proposed bill may push the GFIS such as Land Bank of the Philippines and Development Bank of the Philippines to use all their resources to invest in the MIF without due diligence, because the government guarantee makes these lendings “risk-free assets.”

This can lead to the same “legacy problems” encountered by the National Development Corp., which had to write off billions of pesos in losses due to poor investments in the First Centennial Clark Corp., the National Steel Corp., Philippine National Construction Corp., the Leyte Industrial Development Estate, to name a few.

“Rather than pursue the MIF, we respectfully recommend that the legislature focus instead on working with and strengthening existing institutions and fulfilling developmental aspirations through the budget process as mandated by our Constitution,” the groups said.