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Written by Josiah Garcia and Thapas Vee Pula, with inputs from Ng Yu Kang
Executive Summary
Upon regaining economic momentum in 3Q22, the Philippines was introduced to a new sovereign wealth fund titled ‘the Maharlika Investment Fund’ (hereinafter MIF) on 28 Nov 2022. In its latest version, the MIF extracts funds from the Land Bank of the Philippines (LBP), the Development Bank of the Philippines (DBP), and Bangko Sentral ng Pilipinas (BSP) and is led by the Philippines Secretary of Finance as Chair of the fund along with fifteen other members.
While the MIF was set forth to facilitate economic growth through strategic and profitable investments, it has garnered notable controversies. The controversies pertain to the sources of the funds, amounts of the funds, and the management of funds. While these controversies have mainly been addressed, albeit in a questionably short period of time, a sovereign wealth fund may not be the best move for the Philippines right now given its lack of foreign exchange reserves and rapidly increasing debt. Yet, we think that the MIF is likely to be passed and will have substantial economic and political implications including but not limited to amplifying corruption, weakening BSP’s abilities and limiting its independence, purloining LBP and DBP from opportunities to invest in social welfare programmes, and even worsening investor perception of the Philippines’ sovereign risk. Hence, we find that the Maharlika Investment Fund (in its current form) is a bane rather than a boon for the Philippines.
The Maharlika Investment Fund
The Maharlika Investment Fund (MIF) is a proposed sovereign wealth fund (SWF) in the Philippines that aims to “promote economic development by making strategic and profitable investments in key sectors to preserve and enhance the long-term value of the Fund, obtain the optimal absolute return and achievable financial gains on its investments, and to satisfy the requirements of liquidity, safety/security, and yield in order to ensure profitability.” It was first introduced in the Philippine Congress on 28 Nov 2022 and was approved at the committee level by 3 Dec 2022.
Since its inception, the MIF has undergone multiple revisions as it gained notoriety from the public because of provisions including, but not limited to, the use of social security funds as seed money, the appointment of the president as the chair of the fund management body, and its historic 17-day passage in the congress. The final version of the lower house for the MIF is known as House Bill No. 6608, which the House of Representatives approved for the third and final reading on 15 Dec 2022. On the other hand, the Philippine Senate is deliberating its own version of the fund under Senate Bill No. 1670. Afterward, the Senate and House of Representatives are expected to convene and finalise their decision on the establishment of the MIF before sending it to the executive office for approval.
It is important to note that while the MIF is a controversial policy, it is not the first attempt for the Philippines to have its own sovereign wealth fund. Last 2016, former Senator Paolo Benigno Aquino filed the “Philippine Investment Fund Corporation Act” which has similar aims to the MIF. However, the bill, known as Senate Bill No. 1212, did not garner enough votes to pass the committee level.
Sources of Funds
Under the latest version of the bill, the MIF will be initially funded with PHP 50 bn (USD ~900 mn) coming from the Land Bank of the Philippines (LBP) and PHP 25 bn (USD ~450 mn) from the Development Bank of the Philippines (DBP). Additionally, 100% of the declared dividends of the Bangko Sentral ng Pilipinas (BSP) will be remitted to the MIF for the first two years. After which, it will reduce to 50% until the BSP increases its capitalization in compliance with Republic Act 7653 but will return to 100% once it has been accomplished. 10% of gross revenue streams from the Philippine Amusement and Gaming Corporation (PAGCOR) and other government-owned gaming operators will also be part of the yearly contributions to the MIF.
Other government bodies can also be requested or compelled to contribute to the MIF with the exception of social security systems and other similar institutions, such as the Government Service Insurance System (GSIS) and the Social Security System (SSS). This is an important feature of the latest MIF bill since GSIS and SSS were initially the biggest contributors to the fund, but after a series of backlash from other lawmakers, business leaders, and the general public, it was revised and permanently banned from being part of the MIF.
Management of Funds
The MIF will be managed by the Maharlika Investment Corporation (MIC), a new independent corporate body, which will be chaired by the Secretary of Finance. A 15-member board of directors will act as the highest body managing the MIF, the composition of which are as follows:
The Secretary of Finance;
Chief Executive Office of the MIC;
President of LBP;
President of DBP;
Six representatives from the contributors of the fund, proportionate to their share; and
Five independent directors from the academe, private, business, and investment sectors.
Initially, the five directors were supposed to be assigned by the Philippine President, but this raised concerns about possible conflicts of interest. Thus, the five directors will now be selected by an advisory body composed of the Secretary of Budget and Management, the Secretary of the National Economic Development Authority, the President of the Philippine Stock Exchange, and the President of the Bankers Association of the Philippines.
The composition of the board is designed to insulate MIC from politics by making sure it is managed by technocrats and industry experts. As stated by House Speaker Martin Romualdez, these are “our way of addressing the concerns of our people.” Talks are also in process to ensure that foreigners will not be eligible to be part of the board of directors since foreign investors are also prospective contributors to the MIF.
Issues and Criticisms of the MIF
While popular concerns against the MIF were already tackled by Congress, such as the removal of the GSIS and SSS as contributors and the replacement of the Philippine President as chair, the bill is far from being left without holes. Politics aside, we believe there is another fundamental flaw of the MIF that is yet to be addressed: its source of funding.
LBP, the largest contributor to the MIF, is a government agency specifically responsible for supporting the agriculture sector. If LBP is tapped as a contributor to the MIF, it is likely that its programs will be adversely affected. In the long run, this can hinder the Philippines from harnessing its comparative advantage in agriculture against other economies; even if the country possesses the potential to become a net exporter of agricultural products, it is already having a hard time translating it to tangible results. A huge chunk of the economy’s GDP comes from the service sector (61.05%) and the agriculture sector only contributes 10.07% to the total value. While it is true that there is a possibility that this is because services are generally of higher value, the fact that the Philippines is still a net importer is an indicator that the country is still not ready to transition away from building up its agriculture sector.
Additionally, since the pandemic, the demand for agricultural products seems to be on the rise (Figure 1). This is possible because of the fact that crises shift the public demand to more essential products, such as food. Should the Philippines be able to utilize this opportunity to strengthen its agricultural sector, not only would this be a boost to the economy but also a solution to its rising food prices. On the other hand, investing LBP’s money into the MIF could weaken the institution’s capabilities to capitalise on this sudden growth of demand.
Figure 1
Likewise, the same could happen to DBP, which is another government-owned bank that is focused on helping small and medium enterprises (SMEs) and funding infrastructure projects. There is a huge opportunity cost that entails the plan to transfer PHP 75 bn from these banks to the MIF, which plans and estimated returns are yet to be determined.
Alternatively, the Philippines can fund the MIF via other means, such as by using its foreign exchange reserves. Similar to how Singapore funds its sovereign wealth fund, using excess foreign exchange reserves or commodity-based revenues is a safer source of money that entails less opportunity cost. Unfortunately, the Philippines does not have that kind of leverage; as seen in Figure 2, the Philippines’ reserves are significantly below Singapore’s level, and it has been steadily declining since the start of 2022.
The fall can be attributed to many other factors, but most particularly to the rising government debt since the pandemic (Figure 3) and international developments, such as the US Federal Reserve's aggressive rate hikes. The debt-to-GDP ratio has already jumped to 60% from 40% from pandemic spending, which puts more pressure on the availability of foreign reserves. The option to use foreign reserves as a source of funds for MIF is therefore potentially risky and undesirable considering the current situation.
Figure 2
Figure 3
If using money from other government-funded institutions (GFIs) entails these opportunity costs and excess foreign exchange reserves are non-existent, then the final option the Philippine government has is to fund MIF via loans. This is, of course, pinned upon the idea that the returns from the MIF will outweigh the debt from funding this investment. While possible, it places a significant level of risk into the strategy and integrity of the fund.
Considering all possible options, there is reason to believe that the idea for the Philippines to have its own sovereign wealth fund is not yet completely ripe, given other existing needs of the local economy including consolidation. With the amount of money the MIF would be using, there are safer and more immediate investments that could be funded: may it be in education, transportation, or agriculture. The policy itself is not unfounded; there is a reason why various countries have already established their own SWFs. However, if the Philippines wants to create its own successfully, the most sustainable and beneficial way would be to use excess reserves, either foreign exchange, commodity-based, or revenues from natural resource extraction.
Benefits of Establishing a Sovereign Wealth Fund
While setting up a sovereign wealth fund can be difficult, there are plenty of benefits that come along with it once executed successfully. The world’s largest sovereign wealth funds are worth over a trillion dollars: namely, the China Investment Corporation and the Norwegian Government Pension Fund. Although the success of these funds could be attributed to different factors, similar characteristics also arose over time. For example, a common target for SWFs from countries that export non-renewable goods is to invest in sustainable alternatives to ensure future income. Another common trait between SWFs is that most of them are founded on commodity-based surpluses, such as oil money.
As of the latest version, the MIF falls into neither of these categories as it targets a broader goal of ‘economic growth’ while being funded by other GFIs, instead of any kind of surpluses. To determine what kinds of benefits we can expect from the MIF, we look into two successful examples of SWFs.
Successful Examples of SWFs
Norwegian Government Pension Fund - The Norwegian SWF (valued at USD1.25tn) was established in 1990 using oil money the government has gained in the previous years. Realising that they would only have a finite amount of oil to sell, they decided to establish an SWF to ensure the money would be diligently spent on long-term assets that would benefit the economy - even if oil starts to run out. Currently, the government uses the returns from the SWF to address budgetary deficits, but most notably, to fund sustainable investments. Similar to Norway, the Philippines has a lot of natural resources–may it be land, aquatic, or oil reserves. According to current estimates, the Philippines has untapped oil deposits amounting to about USD26.3tn lying in the area of Spratly Islands. The only problem is this is also the infamous disputed area between the Philippines and the economic powerhouse China. Unless the country gains clear, direct access to these resources soon, it is unlikely that the MIF can be funded in a similar manner and be as sustainable as the Norwegian SWF; nonetheless, the potential still remains.
The Government of Singapore Investment Corporation (GIC) - Unlike other SWFs, the GIC is unique in terms of being the world's first non-commodity-based fund. It was also founded at a time when Singapore was still early in its development, which makes it a good benchmark for comparing it to the Philippines’ MIF. Since its establishment, the GIC has been instrumental in becoming a source of long-term growth for Singapore, which is now one of the most resilient economies in Asia. However, one key distinction between MIF and GIC is that the GIC was created based on government surpluses, and its money is not extracted from other GFIs. This means that resources were still being channeled through relevant pathways, for purposeful means.
Considering the benefit of converting non-renewable sources of growth and excess reserves into long-lasting economic drivers makes SWFs a strongly attractive policy. However, we cannot ignore the glaring differences between the successful SWFs in history and the currently proposed MIF. Their goals might be similar, but the instruments are fundamentally different, which makes the chances of MIF being successful slim in the first place.
Analysis: Passage of the Bill – What does it Mean?
Although the Maharlika Investment Fund bill received overwhelming support from the lower house of Congress, earning the vote of 282 out of 312 members, some members of the Senate seem unconvinced by it. Their fears stem from the weighty but hasty changes made to the sources of funds, the amount of funds, and the management of the funds. Initially, the MIF required an investment of PHP250bn from the Government Service Insurance System (GSIS), Social Security System (SSS), Land Bank of the Philippines (LBP), and Development Bank of the Philippines (DBP), as well as PHP25bn from the national government. It was said that subsequent annual contributions would be made from Bangko Sentral ng Pilipinas (BSP) and the national government. However, upon facing criticism, the bill was revised to only include DBP, LBP, and BSP as sources of funds. The amount of initial funding was cut to PHP110bn - only half its proposed amount, which questions just how much the fund would be able to support that coveted "economic growth". The Secretary of Finance Benjamin E. Diokno replaced President Marcos as the chairman of the bill. While the changes made were deemed necessary in addressing controversies surrounding the bill, they were all major changes made in the span of a meager 11 days after the bill was introduced in the House - suggesting to not just the Senate but also to Filipinos alike that the MIF lacked thorough planning and research before being introduced.
Moreover, when defending the bill, President Marcos dissuaded Filipinos from commenting on or scrutinising the bill as “[they] could be debating about provisions that will no longer exist.” This could further imply to Senators and Filipinos that sufficient research and time was not invested into constructing the bill, prompting the need to continually make changes to it, major ones at that.
However, even with some of the senators being unconvinced by the bill, it is likely to be passed for a few reasons- the first being that the very senators unconvinced by the bill remain a minority in the senate with insufficient power or influence to make tangible change. Only the Minority Floor Leader Aquilino “Koko” Pimentel III, Deputy Minority Floor Leader Risa Hontiveros, and Senator Francis G. Escudero have raised concerns over the bill and will likely vote against its passing. On the contrary, the remaining 21 out of 24 members are members of President Marcos’ political party and are in support of the MIF being passed.
To add on, 3 out of 6 proponents of the MIF are closely related to the President. Speaker Martin Romualdez, who filed the bill, is a first cousin of the president. His wife, Yedda Marie is a member of the House of Representatives, and the president’s eldest son, Sandro Marcos is the representative of Ilocos Norte’s 1st Congressional district. All of the aforementioned individuals have significant power and influence over whether the bill will be passed or not and are very likely to support it. President Marcos is also putting direct pressure on the Senate to pass the bill. He is said to have put in a personal request to pass the bill, to which the Senate President, Juan Miguel “Migz” Zubiri replied “When the President asks for something, it wouldn’t be nice to snub him. We cannot snub him.” The most powerful figure in the Senate himself is in favour of the bill being passed, ideally by Holy Week in early April.
Analysis: Potential Implications of the MIF
If passed, the MIF will have significant implications on the Philippines’ economic and political climate, but not necessarily what is expected of it. The proposers of the bill intend for the MIF to attract and invest capital ‘for big-ticket infrastructure projects, sustainable green and blue infrastructures, and countryside development.’ Through the multiplier effect, the MIF is expected to further increase fund-raising activities and portfolio investments. However, with the lack of a basic investment strategy and outline of how the strategy will achieve the proposed outcomes - it is unclear whether the proposed outcomes will in fact be achieved.
If done correctly though, a sovereign wealth fund can address the Philippines' major infrastructure needs and promote economic growth. Currently, the Philippines is far from other emerging markets in Asia in the quality of its infrastructure (Figure 4).
Figure 4
Difference between the infrastructure levels in the Philippines and emerging markets in Asia
Source: WEF, Global Competitiveness Report 2019
Unfortunately, the MIF may not even attract and invest capital in the ‘right’ areas. The MIF could be seen by some as a way to enable the Philippines government to ‘pick winners’ and create opportunities for corruption. It also could be seen as enabling 'white elephant' or unproductive projects. Take for example the renovation of the San Juanico bridge - a bridge built using more than PHP1bn (~ USD22mn) which is supposed to boost tourism through the installation of lighting. This move has been regularly criticised for not being a significantly productive investment by locals. Government activities like this fuel concerns that the MIF may not end up fulfilling its intended purpose.
The MIF will also potentially limit BSP’s abilities and undermine its independence. As BSP is expected to contribute all of its annual dividends to the MIF, whereby 50%of its declared dividends will be remitted to the fund and the remaining 50% will be remitted to the national government to support the increase in capitalization of the BSP. This strategy hampers BSP’s ability to manage liquidity and inflation, and compromises its independence. Notably, the Core Consumer Price Index has already been consistently high in 2022, peaking at 7.8 % in December (Figure 5). The MIF could indirectly threaten price stability in the Philippines and weaken Economic growth by limiting BSP’s monetary capabilities. In turn, poor monetary activity could worsen investor perception of the Philippines’ sovereign risk.
Figure 5
On top of weakening the LBP and DBP’s ability to capitalise on the growing demand in specific sectors (as elaborated in earlier sections), the MIF could purloin LBP and DBP of opportunities to invest in social welfare programmes. Both LBP and DBP are committed to social causes of their own. LBP invests in a number of social welfare programmes like the LANDBANK Countryside Development Foundation. Likewise, DBP invests in programmes like the Strategic Investments for Healthcare investments Lending and Development (SHIELD) and the Building Affordable Homes for Every Filipino (BAHAY). By extracting large amounts of money from both LBP and DBP, the MIF is limiting its financial ability to invest in a myriad of social welfare programmes crucial for the social development of Filipinos.
Conclusion
At present, the MIF seems to create more opportunities for it to be a bane rather than a boon to the Philippines. In order to gain from a sovereign wealth fund, the proponents of the fund ought to spend more time researching and realising the needs of their economy and their people as well as coming up with a basic investment strategy and plans to identify high-yielding economic and financial projects. This time could also be necessary in re-building the trust that has been eroded by the inadequately researched and planned MIF and its resultant controversies.
Josiah Garcia is a Research Analyst covering the Philippines and Southeast Asia at the SMU Economics Intelligence Club (SEIC), and a first-year quantitative economics and public policy undergraduate.
Thapas Vee Pula is a Research Analyst covering Southeast Asia at SEIC and a second-year economics and data science undergraduate.
Ng Yu Kang is the Director of the Southeast Asia desk at SEIC.