If the Maharlika Investment Fund is not a done deal but still considered a work-in-progress, that’s because it is still being deliberated upon in the Senate up to now, with the target date of a final version for plenary voting set before it suspends sessions for the Holy Week in April.
What the Upper Chamber of Congress is doing at present is inviting resource persons, mainly economists, to give expert opinion on what should be the composition of the fund, how it should be managed, and how it should be insulated from politics, corruption, and money laundering.
Take the stand of the independent think tank Foundation for Economic Freedom (FEF), headed by economist Calixo Chikiamco, who explained before senators what their group thinks of the Philippine version of a sovereign wealth fund (SWF) that’s been put up by a number of countries.
First, the think tank warned that if the House version of the Maharlika Investment Fund is passed into law, it could spread contagion in the Philippines’ financial system.
The current version of the sovereign wealth fund, as passed by House lawmakers, identifies the Land Bank of the Philippines and Development Bank of the Philippines as the main sources of its seed capital.
The LBP would contribute P50 billion as initial capital for the Maharlika, while the DBP would inject P25 billion.
The Marcos Jr. administration is also eyeing the sale of state-owned assets, such as casinos and power plants, to bankroll the fund’s initial capitalization.
The FEF cautions against financial ruin if the administration pushes through with the funding sources of the proposed fund.
Why? If the seed money that will be provided by state-run banks is not guaranteed by the national government, it increases the systemic risk on the country’s banking system.
The exposure of state-owned banks in a single investment could possibly breach prudential regulations for this kind of investment.
If the government removes guarantees on investments from state-owned banks, this will spawn a host of systemic risks in the banking system, making it wobbly.
The market will perceive this and create contagion and financial panic, as what happened during the 1997 Asian financial crisis, when companies thought central banks would protect exchange rates, leading to excessive dollar borrowing.
The 2008 financial crisis took place as American banks began a pattern of predatory lending, unfounded risk-taking, and exploited derivatives that led to the eventual collapse and bailout of investment banks.
The think-tank clarified they did not object to the wealth fund at all, but that the current Maharlika version needs to be reassessed.
Second, if the seed capital is guaranteed by the national government, risks still abound.
What is guaranteed, the principal or the income?
In so far as securities are concerned, it is not clear if there’s such a thing as guaranteed equity.
Third, the think-tank believes that guaranteeing the seed funding creates a moral hazard of sorts, since parties who would be involved in the Maharlika Investment Fund are protected from any possible fallout from ill-timed and ill-advised financial decisions.
That would “incentivize parties to be reckless…LBP and DBP will not need to do any more due diligence.”
Fourth, the Maharlika’s current version is also exempted from the government’s Procurement law and the Salary Standardization law.
The latter would remove ceilings on how much an individual could earn in return for working at Maharlika.
The proposed sovereign wealth fund also has a raft of exemptions, including the payment of taxes on Maharlika’s funds, assets and properties, among others.
The House version rationalized this by saying the government would have the discretion to hire experts, such as fund managers, to run the investment fund.
The fund’s gains from its investments would be exempt from taxes at both the local and national level.
The FEF is convinced exemption from payment of all taxes would create an uneven advantage over others.
The playing field should be level. It’s not so much where money will go but the playing field will be uneven.
Given all these arguments aimed at making the Maharlika Investment Fund an effective vehicle for sustained economic growth, the question that needs to be answered is whether the Senate can come up with its own version that will be acceptable not only to the majority of its members – which is almost sure, given its current composition – but also to experts.
We’ll have to wait and see.
Should we leave it to the discretion of the Senate – given that it is dominated by those unflinchingly allied with the administration – to decide on what will be in the best national interest?
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