A Philippine wealth fund, seriously?

A hornets' nest has been stirred in the business community particularly among financial practitioners since the House of Representatives passed HB 6398 creating Maharlika Wealth Fund which seeks to capitalize the fund with capital contributions coming from the BSP, SSS, GSIS, LandBank and DBP amounting to P250B or roughly a little less than $5B.

For reference, the world's largest sovereign wealth fund in assets under management size, as of June 2022, is the Norge Bank Investment Management (Norway) at $1,362B followed by the China Investment Corporation at $1,222B, and the State Administration of Foreign Exchanges (China) at $980B.

The Abu Dhabi Investment Authority (UAE) and the Government of Singapore Investment Corporation follow next with $829B and $79B in AUM, respectively. Other ASEAN countries which have SWFs are Malaysia $37B, Vietnam $1.2B, Brunei $60B, and Indonesia $5.3B.

For the non-savvy readers out there, you might be wondering what is an SWF anyway? Well in simple terms, it is no different from setting aside some excess cash that you have saved up for a rainy day.

However, instead of putting the funds in a bank to earn a measly interest rate, you leave the management of the money to a governing board composed of investment professionals with the expectation that their collective expertise will provide a much higher return. Seems reasonable enough, so what's the fuss?

First off, SWFs are typically surplus government revenues generated from the sales of the country's natural resources such as commodities, oil, or minerals during boom times. Examples of such countries are the OPEC members who, except for occasional irresponsibly led outliers who use their SWFs for their sinister agenda, like Venezuela, Russia, or Iran, most boast of massive treasure chests.

The ostensive motivation for SWFs is to hedge for the inevitable future price or demand cycle downturns. The theory is that SWFs, if wisely deployed during the robust years, should provide the buffer for the lean years. Another source of funding, although atypical, would be surplus funds because of a healthy fiscal position. A notable example that readily comes to mind is Singapore, a country with no natural resources to speak of and yet has enviable surplus funds in search of fatter returns.

Very clearly, countries that have SWFs are usually those with bulging FX reserves of a hundred times multiple of their regular FX needs or those with hardly any foreign debt to worry about. The keyword, in all instances, is SURPLUS. With this very simple metric to go by to determine if a wealth fund should be seriously considered for the Philippines, let's ask ourselves a simple question: Are we anywhere in a surplus position? I think the answer to that is pretty obvious, particularly in light of how Covid-19 impacted our economy. We would be extremely lucky if we can recover our pre-covid financial footing within the next ten years. NEDA under then Secretary Karl Chua had earlier forecasted that the country would continue to suffer from Covid-19 aftershocks for the next 40 years resulting in a productivity loss in human capital investment and returns of up to P15.5 trillion.

So, if there is no surplus, how are we then supposed to fund Maharlika? Folks, the proposal is to have the bulwarks of our country's financial system contribute to the $5B capital. Am I missing something? Aren't those government financial institutions simply custodians of the public's hard-earned money either as deposits or pension contributions?

Given this grave fiduciary responsibility, shouldn't the criteria for investments be of the most conservative degree? But aren't SWFs precisely meant to be invested in riskier propositions to deliver long-term capital growth? What if the SWF doesn't deliver the high yields promised? Neighboring Malaysia and Singapore have had their share of mishaps. Should we take such risks? Hmmm … a lot of questions to ponder.

Until next week… OBF!!!

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