Cronies wealth fund?

The first thing that came to mind when I heard about plans to put up a sovereign wealth fund is 1MDB. That’s Malaysia’s version and they lost $4.5 billion on bad use of the fund.

Luckily for Malaysians, their rule of law works. The prime minister responsible for 1MDB losses is now in jail.

Can’t say our justice system works as well. No president has yet gone to jail for corruption. Erap was found guilty by the Sandiganbayan, but then PGMA pardoned him within minutes.

Of course, we still remember how cronies of Junior’s father used funds of government financial institutions (GFIs) supposedly to promote sugar, coconut, 11 industrial projects, etc, but we all know what happened.

So, when Junior and his minions are railroading a bill creating a Philippine SWF using mostly our SSS and GSIS pension funds, it is natural to get very bad vibes.

Then again, I think they just got carried away by calling it a SWF. I read the draft bill and it sounds to me more like a super GFI. I think it is unnecessary.

What is a sovereign wealth fund? A SWF is the surplus money that a country accrues over time. The proponents of the bill described it as state-owned investment funds typically financed by a country’s surplus revenues or reserves.

Unfortunately, some folks started to believe their press releases and proposed the creation of a sovereign wealth fund out of the BSP’s FX reserves. If $95 billion represents 2.3 times what is adequate, they argued that we need no more than $41.3 billion in reserves.

The thing is… we count proceeds of foreign loans taken out by the government and deposited with BSP as part of our gross international reserves. I don’t see enough export proceeds, OFW remittances, and BPO earnings that produces surplus forex reserves to be invested in a sovereign wealth fund.

Saudi Arabia and Norway have sovereign wealth funds because they have surplus forex earnings from the exploitation of oil resources. Singapore has two sovereign wealth funds because they have been earning a lot as a trading hub.

In our case, they must have realized they cannot bet our GIR in a SWF. The proposal now is to bet our retirement money in GSIS and SSS.

That elicited this comment in one of my Viber groups: “Hirap na nga mga tao sa contribution nila… GSIS contribution has been increased to nine percent of an ordinary government employee’s salary, and pension is not anymore based on the last salary, but average salary in the last three years and only 90 percent of that average will be given… There is a new proposal to make it average salary for the last 10 years!!!”

Our government already has problems funding the retirement funds for the police and the military. At his worst, Junior’s father did not mess with SSS funds.

But Marcos Senior did use GSIS to buy Philippine Airlines and Manila Hotel, among others. Government workers lost money on those investments. SSS and GSIS money are private money that belongs to workers and are only being managed by government.

In short, it is not right to risk our retirement money in a SWF. Asset preservation and actuarial principles should prevail. We cannot afford the risks SWFs take.

For example, Singapore last week acknowledged having to write down $275 million in losses from Temasek’s investment in FTX, the cryptocurrency exchange.

Bloomberg reports that Norway’s $1.3 trillion sovereign wealth fund had posted its biggest loss ever of $174 billion in the six months through June. Market volatilities were blamed for the loss.

A retired banker told our Viber group that he once wrote a note for treasurer Rosalia de Leon and former BSP gov. Amando Tetangco on the feasibility of a sovereign wealth fund around 10 years ago. At the time of the query, the banker said it looked like the Philippines was fast accumulating GIR, so the question was what to do with the excess reserves to ameliorate the strength of the peso.

He explained to them that SWFs are meant to manage windfall bonanza wealth from commodity earnings or accumulated BOP surpluses embodied in international reserves for future generations, that these are not frittered away through current consumption spending.

The Philippines does not have bonanza commodity earnings. We have more imports than exports.

“We now have a high debt/GDP. Instead of needing to conserve present wealth for future generations, these future generations now have to make debt payments on present debt.

“For GSIS/SSS to fund the SWF could affect the actuarial life of pension funds. Putting their funds with an SWF, no matter the so-called Santiago principles would be less transparent than GSIS managing its investment fund directly. Same with SSS…

“This is just round tripping, not creation of new wealth. These are not bonanza funds. Whatever intentions the politicians have, it does not make sense at this time from the economics point of view.”

Former BSP deputy governor Diwa Guinigundo, who has worked with the central bank for over 40 years, has another perspective.

“While the return on SWFs’ may be anywhere north of seven to eight percent, for instance, investing the principal on education and skills training, health and services are equal, if not superior, investment outlets of public money, now rather than later.

“It does not make sense, therefore, to be thinking of putting up an investment vehicle that would be funded by public money at this point when competing demand with greater social relevance is badly needed in the fringes of our society.

“Given the nature of existing SWFs, it’s their surplus funds that are invested to make money to help their public finance. This is hardly the case in the Philippines.”

Former NEDA chief Romy Neri agrees. “The best form of sovereign wealth is a nation of healthy and intelligent Filipinos. Whatever money we have is best put to our children’s nutrition and education. Both are in very poor state.”

To me, the worst threat is these funds financing cronies like what happened in Marcos1. Cronies aren’t the best businessmen, as we have seen. Not worth losing the pensions workers need to survive their senior years.

Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco