Contributing to sovereign wealth fund could undermine BSP’s independence, analysts say

REQUIRING the Bangko Sentral ng Pilipinas (BSP) to contribute its annual dividends to the Maharlika Wealth Fund (MWF) could undermine its integrity, analysts said.

Calixto V. Chikiamco, president of the Foundation for Economic Freedom (FEF), said mandating the central bank to contribute its dividends to the planned sovereign wealth fund is “a bad idea.”

“Firstly, it amends the Charter of the Bangko Sentral, which mandates that the dividends of the BSP will go to its recapitalization. Such an amendment in the MWF is legally doubtful without an express amendment of the BSP Charter,” Mr. Chikiamco said in a Viber message.

“More importantly, by mandating that the profits of the BSP go to the MWF, it will undermine the mission and integrity of the Bangko Sentral because the BSP will be perceived as a profit-making institution and its income objectives will be perceived as driving monetary and exchange rate policy,” he said. “It will destroy BSP as a credible institution focused on fostering price and financial stability.”

On Friday, Finance Secretary Benjamin E. Diokno said the proposed Maharlika Wealth Fund is being revised to require the BSP to contribute 100% of its annual dividends into the sovereign wealth fund for its first two years.

After the fund’s first two years, the central bank will only need to remit 50% of its declared dividends to it, with the remaining 50% to be deposited to a special account meant to ramp up the P200-billion capitalization of the BSP.

The Maharlika Wealth Fund could again receive 100% of the BSP’s dividends once the central bank is fully capitalized.

Several lawmakers headed by House Speaker Ferdinand Martin G. Romualdez and Deputy Majority Leader Ferdinand Alexander A. Marcos last month filed a bill seeking to create a sovereign wealth fund in the country with an initial capitalization of P250 billion.

Last year, the BSP’s net income stood at P34.81 billion, while its dividends amounted to P17.41 billion.

In 2019, the BSP booked a net income of P46.1 billion, declaring dividends of P23.05 billion. Its net income stood at P31.79 billion in 2020 with its declared dividend at around P15.89 billion. 

“The whole concept of the MWF is a bad idea at this time and is irreparable. No amount of safeguards can salvage the concept, especially if the funding comes from the BSP,” Mr. Chikiamco said.

“Better that they reconceptualize the idea from the MWF to a development finance institution, revive the National Development Corp. (NDC) for the projects it wants to finance, and look at the privatization of government assets to recapitalize NDC,” he added.

Several business associations, economic policy groups, civil society organizations and labor groups have likewise opposed the proposed measure, citing concerns over lack of transparency, possible corruption and misuse of pension funds.

“The need to create a sovereign wealth fund has been felt across several countries in Southeast Asia with India, Malaysia, and Indonesia taking the lead on this front. However, such funds are usually funded by commodity revenue or excess foreign reserves, none of which the Philippines possesses,” Swarup Gupta, industry manager of the Economist Intelligence Unit, said in an e-mail. 

“In contrast, the Philippines has the highest fiscal deficit among economies in Southeast Asia, which makes the creation of a sovereign wealth fund a risky move at a time of great global economic uncertainty,” he added.

The National Government’s budget deficit ballooned to P99.1 billion in October, 54.08% higher than the P64.3-billion deficit in the same month a year ago.

Meanwhile, for the first 10 months, the fiscal deficit narrowed by 7.61% to P1.11 trillion from the P1.2 trillion during the same period a year ago.

Mr. Gupta said getting MWF funding from the BSP is “a move that could easily undermine the independence of the central bank and the country’s foreign exchange reserves, which could have serious implications if the global economic outlook worsens.”

“The example of Malaysia’s ill-fated 1MDB (1Malaysia Development Berhad) fund has often been quoted by critics of the fund, and with good reason,” he added. “While the Philippines’ fund will be subject to multiple audits, its initial charter allows investments in all possible asset classes without restriction.”

“Also, there are concerns about governance standards and clear objectives need to be laid out in order for it to be successful. The presence of an independent ombudsman, who periodically checks on the working of the fund, could go a long way towards preventing any malfeasance,” Mr. Gupta said.

The wealth fund must also align with international best practices laid down by the International Monetary Fund, he added. 

Domini S. Velasquez, chief economist at China Banking Corp., said a concern is if the budget would go through proper review channels or through a legislative process.

“In automatically diverting dividends to the Maharlika Wealth Fund, we lose this check and balance on government’s spending. As of now, the current proposal of the Maharlika Wealth Fund does not seem to have sufficient safeguards to guarantee promises of the proponents,” Ms. Velasquez said.

“I agree with most critics that timeliness of creating a wealth fund is vital. In a time where we need to bring down debt and close the fiscal deficit, dividends from revenue-generating government institutions are important to support fiscal consolidation of the government,” she added. — Keisha B. Ta-asan