Defeat

The five-month old Marcos II administration appears headed towards its first policy defeat relating to a proposal to set up a sovereign wealth fund (SWF) supported at the House of Representatives by the President’s cousin Speaker Martin Romualdez and son Sandro Marcos. Proponents claim the proposal has the endorsement of President BBM, thereby putting the Chief Executive’s political capital on the line.

The coming policy defeat is not due to any dramatic realignment in the configuration of political forces. It will be due entirely to the greater tenability of the arguments against the establishment of such a fund.

Setting up an SWF is not a new idea. It was first proposed when Bam Aquino was senator. It did not gain traction then. It is unlikely to gain traction today.

It does not help that the legislators unwisely chose to name the fund “Maharlika.” It is a name associated with the first Marcos administration and the unbridled crony capitalism it spawned.

It also does not help that the highly respected Norwegian SWF, using surplus earnings from its profitable oil industry to secure future generations, recently reported a loss of $174 billion in the first 10 months of this year. That loss alone is about double our outstanding public debt. The twin Singaporean SWFs, managed by the most scrupulous financial experts, likewise reported a huge loss this year. The losses are due to the global financial volatilities during the past few months.

In addition, the establishment of a Filipino SWF recalled the massive failure of Malaysia’s 1MDB due to the shameless looting by former prime minister Najib Razak, who has been sentenced to 12 years in jail. The looting amounted to a staggering $4.5 billion in losses.

The President’s own sister expressed reservations about the idea. BSP governor Felipe Medalla outrightly declared that using funds from the country’s gross international reserves will compromise the independence of our monetary authorities.

A position paper is currently being circulated for signing by the country’s major business associations and economic policy advocacy groups led by the Foundation for Economic Freedom (FEF). It is a strongly-worded paper stating that the signatories “do not support” the formation at this time of an SWF. Similar strongly-worded petitions are being circulated for signing by stakeholders of the SSS and GSIS.

Generally, the FEF-initiated paper argues, SWFs are formed to invest windfall revenues from natural resource extraction (oil in the case of Norway and Saudi Arabia) or from persistent external trade surpluses (China). We have neither. We are at the bottom of the commodity exports list in the ASEAN.

This is the first, and probably incurable, flaw in the draft bill to set up the Maharlika SWF. It seeks to constitute a fund from “contributions” from the SSS, the GSIS, the LBP, the DBP, the BSP (using our international reserves) supplemented by budgetary allocations.

Diverting investment money from the GSIS and the SSS is probably illegal. The pension funds are owned by its members and not by government. The two institutions are, as things stand, rendered vulnerable by short actuarial horizons that could threaten the pensions of our younger workers.

Investments by the pension funds are guaranteed by the national government. If transferred to an SWF, the guarantee is extended. This is a moral hazard. It could lead to bottomless contingent liabilities that could plunge national government into another debt crisis.

Taking funds from the country’s gross international reserves trespasses on the BSP’s independence in managing our monetary assets. As things stand, our gross international reserves are barely enough to ensure currency stability. Allocating a significant portion of the reserves to the SWF will very likely face strong legal challenges.

This leaves us only with funds contributed by the government banks. But these banks are doing a fairly good job at lending money to help the country achieve its “development” goals. Allocating their investment portfolio to another layer of decision-making will, at best, result in a few basis points in additional revenue. This might not even be enough to cover the additional cost of maintaining and staffing an SWF.

In a word, the position paper of the business groups observe, there is no “missing institution” in the present investment setup that will merit establishing an SWF.

Trying to justify the Maharlika SWF, its proponents magnify its flaws.

For instance, one real justification for setting up SWFs is to enable enough flexibility for them to scour the world’s financial markets for areas of greatest gain. But to appease “nationalist” critics, legislative proponents promise to insert provisions limiting Maharlika SWF investments to Filipino entities. That eliminates the only probably superiority of an SWF over existing government financial institutions.

No investment is entirely risk-free. In a turbulent global financial environment, as we see in the Norwegian and Singaporean SWFs, the magnitude of such funds do not make them immune from losses – even with the best risk management units in place. Risk management does not inoculate even large investment institutions from losses. See what happened to Lehman Brothers.

This might not be the time to push for Maharlika SWF. Anti-administration forces will simply use this proposal, exploiting the low financial literacy of our public, to recall the real or imagined excesses committed during the time of Marcos the Elder.

The proposed SWF is so badly designed it leaves businessmen and economists aghast. It might be best to shelve this bill instead of courting policy defeat. The President has his political capital to protect.