February 4, 2023

Filipino Guardian

Sentinels of Filipino Free Press

A contribution to the sovereign wealth fund could undermine BSP’s independence, analysts say


Requiring 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 it was “a bad idea” to require the central bank to put its dividends into the proposed sovereign wealth fund.

“First, it amends Bangko Sentral’s charter, which mandates that BSP’s dividends go toward its recapitalization. Such a change in the MWF is legally dubious without an explicit change in the GNP charter,” Mr. Chikiamco said in a Viber message.

“More importantly, by requiring BSP’s profits to go to MWF, Bangko Sentral’s mission and integrity is undermined as BSP is perceived as a for-profit institution and its income goals are perceived as driving monetary and exchange rate policies,” he said. “It will destroy BSP as a credible institution focused on promoting price and financial stability.”

On Friday Treasury Secretary Benjamin E. Diokno said the proposed Maharlika Wealth Fund would be revised to require the BSP to pay 100% of its annual dividends to the sovereign wealth fund for the first two years.

After the fund’s first two years, the central bank only has to transfer 50% of its declared dividends to it, with the remaining 50% being paid into a special account designed to boost BSP’s 200 billion plague capitalization.

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

Several lawmakers, led by House Speaker Ferdinand Martin G. Romualdez and Deputy Majority Leader Ferdinand Alexander A. Marcos, filed a bill last month that would create a sovereign wealth fund in the country with an initial capitalization of 250 billion pesos .

Last year, BSP’s net income was P34.81 billion, while dividends were P17.41 billion.

In 2019, BSP recorded a net profit of P46.1 billion and declared dividends of P23.05 billion. Its net income for 2020 was P31.79 billion and the declared dividend was approximately P15.89 billion.

“The whole concept of the MWF is a bad idea and irreparable at this point in time. No amount of safety precautions can save the concept, especially when the funding comes from the BSP,” said Mr. Chikiamco.

“Better that they revamp the idea from the MWF to a development finance institution, the National Development Corp. (NDC) for the projects it wants to fund and consider privatization of state assets to recapitalize NDC,” he added.

Several business associations, economic policy groups, civil society organizations and workers’ groups have also opposed the proposed measure, citing concerns about a lack of transparency, possible corruption and abuse of pension funds.

“The need to create a sovereign wealth fund is being felt in several countries in Southeast Asia, with India, Malaysia and Indonesia taking the lead on this front. However, such funds are usually funded by commodity revenues or excess foreign exchange reserves, which the Philippines does not possess,” Swarup Gupta, industry manager at the Economist Intelligence Unit, said in an email.

“By contrast, the Philippines has the highest budget deficit among Southeast Asian economies, making setting up a sovereign wealth fund a risky move at a time of great global economic uncertainty,” he added.

The national government’s budget deficit widened to P99.1 billion in October, up 54.08% from the deficit of P64.3 billion in the same month a year ago.

Meanwhile, the budget deficit narrowed by 7.61% to 1.11 trillion pesos in the first 10 months from 1.2 trillion pesos in the same period a year ago.

Mr Gupta said MMF funding from the BSP was “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 deteriorates”.

“The example of Malaysia’s ill-fated 1MDB (1Malaysia Development Berhad) fund has often been cited by critics of the fund, and with good reason,” he added. “While the Philippine fund is subject to multiple reviews, its original charter allows for investments in all possible asset classes without restrictions.”

“Also, there are concerns about governance standards and clear goals need to be set for it to be successful. The presence of an independent ombudsman to regularly review the functioning of the fund could go a long way in preventing wrongdoing,” Mr Gupta said.

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

Domini S. Velasquez, chief economist at China Banking Corp., said there were concerns over whether the budget would go through proper review channels or a legislative process.

“By automatically diverting dividends to the Maharlika Wealth Fund, we lose that control and balance of government spending. So far, the Maharlika Wealth Fund’s current proposal does not appear to have sufficient safeguards to guarantee the promises made by the proponents,” Ms. Velasquez said.

“I agree with most critics that setting up a wealth fund in a timely manner is crucial. At a time when we need to deleverage and close the budget deficit, dividends from revenue-generating government institutions are important to support the government’s fiscal consolidation,” she added. — Keisha B. Ta-asan