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Sovereign wealth fund benefits cited

Posted on April 24, 2013

A SOVEREIGN wealth fund will allow the Philippines to benefit from dollar-earning sectors such as business process outsourcing (BPO) and overseas remittances without risking exchange rate volatility, an International Monetary Fund (IMF) said.

“The sovereign wealth fund is definitely a mechanism that can break the link between these huge inflows and the exchange rate,” IMF Senior Economist Jaime Guajardo said in an interview last week.

The Philippines has been buoyed by robust BPO earnings that hit $13 billion last year, up by 18.18%. Overseas remittances totalling $21.391 billion, up 6.3% from 2011 and breaching the Bangko Sentral ng Pilipinas’ (BSP) 5% growth target, also provided a boost.

While these two areas have propelled the services sector and private consumption, they have also pushed up the value of the peso, affecting local exporters.

This is the so-called Dutch disease, Mr. Guajardo said. As dollars come in and the local currency strengthens, other sectors become less competitive and collapse.

Mr. Guajardo, however, said: “Once the government invests these inflows abroad through the sovereign wealth fund, you are isolating part of their impact from the exchange rate.”

A sovereign wealth fund utilizes a country’s foreign exchange assets. Instead of keeping these in the central bank as reserves, the money is invested outside the country. Higher returns could provide a windfall for the Philippines and fund much-needed infrastructure, Mr. Guajardo said.

“You may also get a negative shock in the economy and instead of borrowing and incurring external debt to finance, at least you can use some of the funds that you have abroad,” he added.

“I don’t think it’s an issue that the Philippines is too small a country to make a sovereign wealth fund,” Mr. Guajardo also noted.

Chile, for example, pools revenues from its mining industry for its sovereign wealth fund. The same can be done by the Philippines, he said.

The country does not have a sovereign wealth fund given the lack of an enabling law that would give the BSP or the government the authority to establish one. Central bank Governor Amando M. Tetangco, Jr. and Finance Secretary Cesar V. Purisima have said, though, that the issue was being considered. -- D. C J. Jiao