Signs And Wonders
By Diwa C. Guinigundo
Nikkei Asia, on March 14, acknowledged that as it stood, Philippine Senate Bill (SB) No. 1670 reflected House Bill (HB) No. 6608 as approved by the Lower House of Congress in that both versions deleted the provision enlisting the pension funds as a source of seed money for the Maharlika Investment Fund. The funding role of the Government Service Insurance System (GSIS) and the Social Security System (SSS) disappeared only because both active and retired private and government employees raised hell.
The Philippine Senate did not disappoint during the public hearing.
Both the opposition and administration senators — at least some of them — raised very fundamental issues on the real motives behind the investment fund because the bill purports to consolidate investible funds of public agencies including government financial institutions (GFIs) and invest them more optimally.
The Maharlika in many respects substitutes for Congress and the line departments because with all the prospective public money at its disposal, the fund could choose whatever infra project or real estate development it may wish to consider funding. So very broad is the Maharlika’s prerogative that a catch-all phrase empowers it to invest in almost anything as long as its board may allow it.
After a series of public hearings and technical working group discussions, a joint committee report was released by the Committees on Banks, Financial Institutions and Currencies; Government Corporations and Public Enterprises; Ways and Means; and Finance, recommending approval of SB No. 2020 as a substitute bill two months ago.
Many senators indicated they would interpellate and introduce some amendments, others simply signed up. Only Senator Koko Pimentel qualified his signature with his dissent.
Was the Philippine Senate responsive to the voice of the Filipino civil society? Difficult to say at this point. The plenary debate is in progress but based on the current version which was certified urgent by President Ferdinand “Bongbong” Marcos, Jr. on May 22, very little has changed.
First, the funding requirement was even increased from an initial P75 billion plus annual increments from the dividends of the Bangko Sentral ng Pilipinas (BSP) and other government-owned or -controlled corporations (GOCCs) and government financial institutions (GFIs) to an incredible amount of P500 billion. The cost of management was unchanged at 2%. But given the ballooning base capital, that easily comes up to P10 billion a year. Since this will be funded by public money, can we afford the principal and the management cost when other critical social needs demand an increasing share of the budget?
Second, what is most glaring feature of the new version was the de-facto restoration of GSIS and SSS as possible funding sources of Maharlika.
It is true that Section 6 of Article II explicitly provides that “Under no circumstance shall the GOCCs providing for the social security of government employees, private sectors, workers and employees, and other sectors and subsectors, such as but not limited to the GSIS, SSS … be requested or required to contribute to the Maharlika Investment Corporation.”
But reading down Section 12, Article III, the bill allows both GFIs and GOCCs — and they presumably include both GSIS and SSS — to invest into the Maharlika Fund subject only to their investment and risk management strategies, and approval of their respective boards.
We don’t need science to figure out the likely inclination of those boards.
And if we must, should these pension funds’ investments in Maharlika turn sour, what happens to our old and prospective retirees whose retirement benefits might likely be dissipated?
Third, and this was carried over from the House and previous Senate versions to the new version, is the institutionalization of bypassing Congress on budget matters. By earmarking public revenues from dividends of both GFIs and GOCCs including the dividends from the BSP, Congress is virtually investing Maharlika with the power over the purse. Once these public revenues are under the control of the Maharlika, it is free to invest them in various investment instruments or vehicles. These include real estate and other development projects, loans and guarantees to commercial, industrial, mining and other enterprises.
Maharlika has a whole wide spectrum of flexibility. National Economic and Development Authority (NEDA) endorsement is necessary only for investments in real estate and limited to capital projects. Anything other than these could qualify for Maharlika investment under a catch-all provision allowing the use of the funds for “other investments as may be approved by (its) Board.”
The bill effectively bypasses Congress in the use of public money to support public works projects and infrastructure. We are not sure if Congress realizes the implication of this bill on its own authority under the Constitution.
Equally important, under the one single fund concept, once all these government dividends and contributions are earmarked for the Maharlika, public revenues would decline. The National Government has to compensate by more borrowings or higher taxes, or both. Another option is to trim public spending but in the process, curtail economic growth.
We don’t think this is a choice between the devil and the deep blue sea. The dividends are helping fund the budget aimed at developing and expanding our productive capacity. The Maharlika is an iffy investment proposition which would have to navigate a very difficult global economic environment.
Fourth, the bill continues to tap the BSP’s dividends intended to recapitalize itself and enhance its ability to stabilize the macroeconomy. Diverting the BSP dividends from self-recapitalization weakens the independence of the BSP and precisely compromises its ability to promote stable prices, strong banks, and reliable payment and settlement system.
Instead of keeping its dividends as additional equity, the BSP is mandated to yield to Maharlika all its dividends for the first two years to cover the National Government’s P50-billion equity contribution, 50% for the succeeding years until the BSP is fully recapitalized, and all its dividends thereafter until such time that the Government has fully paid up its share. Thus, instead of accelerating the BSP’s recapitalization due to the more volatile global markets, the bill stalls it. The Monetary Board is also allowed to change the rules of the game; Maharlika’s entitlement could be extended. But since Monetary Board members are appointed by the President, the independence of their decision might be open to question.
No one wants to have a central bank that is underpowered in fulfilling its responsibility of keeping money supply appropriate and supporting banks in times of market stress. The delivery of price and financial stability costs money and if the BSP fails to raise its capital resources, it would have a difficult time managing the economy. We don’t want to see a déjà vu of 1993 when the old central bank was abolished in favor of a new BSP.
Congress should be prepared to explain it to the Filipino taxpayers if they should have to finance BSP II.
The final major objection to the bill is another non-starter, and this is tapping the two major GFIs, the Land Bank of the Philippines (LANDBANK) and the Development Bank of the Philippines (DBP). In the new version, the Maharlika Fund shall have an authorized capital of P500 billion distributed into P375 billion in common shares and P125 billion in preferred shares. The National Government, the LANDBANK and DBP and other public instrumentalities will be splitting the common shares while the preferred shares shall be subscribed to by, again, the National Government, public instrumentalities, and “reputable private financial institutions and corporations.”
From a financial stability perspective, the involvement of both the LANDBANK and DBP could affect their financial health and set off potential bank runs and systemic risks. Their investible funds earmarked to Maharlika are deductible from their regulatory capital. Therefore, they could be constrained from both lending to key areas of the economy and investing in other infrastructure and social development projects. This could affect their liquidity and profitability, leading to contagion and bank distress.
The National Government might not realize it, but it’s the National Government and other public agencies that comprise a large portion of these GFIs’ clients, including their employees and officials. We could just imagine how their shaky financials could trigger unsettling market talk.
We quote the last paragraph of our open letter to our senators sent on Feb. 17: “This is hardly the best time to create the MIF. Earmarking resources for funding the budget deficit could drive the government to incur higher borrowing or impose higher taxes, or both. An investment fund is not worth undermining our existing institutions. We have managed to grow all these years without an investment fund, and we have also charted the next six years to achieve robust and resilient economic growth in the new development plan, all without this costly investment fund.”
If they are not obvious, our speed bumps are those sad tales of failed sovereign wealth funds that dissipated national wealth and imprisoned even their heads of states.
Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.