MIF: Picking up the pieces?
The directive of President Marcos dated Oct. 12 signed by Executive Secretary Lucas Bersamin was quite parsimonious with words:
“With reference to the IRR (Implementing Rules and Regulations) of RA No. 11954, and upon the directive of the President, the Treasurer of the Philippines, in coordination with the LBP and DBP, is hereby directed to suspend the implementation of the IRR of RA No. 11954 pending further study thereof, and to notify all concerned heads of departments, bureaus, offices and other agencies of the executive department, including the GOCCs of such action.”
The directive was rather silent on the extent of the study, or the relevant timeline to doing due diligence.
At this point, we could only speculate on the possible reasons why Malacañang had directed the suspension of the implementation of the Maharlika Investment Fund (MIF) and subject it first to further study. Due diligence should have been done before it was even submitted to Congress for legislation. Definitely, not after it became a law.
For some MIF champions had lost face when they had to back off and delete the inclusion of pension funds of both the GSIS and the SSS (Government Service Insurance System and Social Security System). The foreign exchange reserves of the Bangko Sentral ng Pilipinas (BSP) were also originally targeted to fund the MIF until the sourcing was limited to its annual dividends. At first, the commitment of BSP dividends to the MIF was virtually forever, until better judgment prevailed and only the first two years’ worth of dividends were earmarked. BSP was even mandated to extend regulatory relief to both institutions should they run into difficulty as a result of their participation in the MIF.
While Congress can legislate otherwise, it is folly to ignore the need to keep the monetary authority financially robust. Otherwise, it would be contradicting the intent of both the 1987 Philippine Constitution and the amended BSP Charter to establish an independent and autonomous central bank. Institutional independence means it should be properly capitalized.
The law mandated that the bulk of the seed money was to be sourced from the two government financial institutions (GFIs). Landbank (LBP) was to contribute P50 billion and the Development Bank of the Philippines (DBP) P25 billion. If there was complete staff work, it would have dawned on the proponents that the GFIs’ contributions to the seed fund would have a 100% capital charge. Unless they are able to raise their capital, they cannot lend out without weakening their capital adequacy ratio and risk violating BSP capital requirements.
The broad issue behind the BSP and the GFIs is therefore financial stability. Is the BSP financially prepared to provide financial support to any financial institution, including the GFIs, if necessary? But the BSP itself is required by the Maharlika law to remit its dividends to the Fund instead of keeping them for recapitalizing itself! Will the GFIs still be compliant with the BSP capital requirements after they remitted their shares?
Was this the motivation behind the presidential directive? Was it meant to pick up the pieces following the quick but much criticized readings in both houses of Congress?
If we are to take it from Rappler, it’s a nope. Such a suspension “has little to do with the concerns of banks falling short of capital requirements.” It is more in preparation for the upcoming announcements on the possible revamp of the President’s cabinet in the coming weeks. At least three cabinet members are rumored to be replaced. Quoting a source, Rappler claimed that the suspension was necessary for administrative flexibility. The President, the appointing power for the officers and board members of the Maharlika Investment Corp. (MIC), should be allowed to choose from outside the list of nominees submitted by the advisory body pursuant to the law. That could politicize the MIF and violate some of the 24 Santiago Principles cited as one of the safeguards in the law itself.
Whether the IRR could correct this legal limitation must be the subject of “further study.”
But if political expediency is now going to define our legislative process and execution of public policy, it is time to pray. There must be a better explanation, otherwise the elephant in the room will stay for good.
For one, the GFIs would not seek regulatory relief if they don’t need it. Some actual numbers have been proffered to show that the GFIs continue to be resilient and compliant, but those numbers are old. If this is true, it is possible that when they have to sustain their rate of lending, their capital adequacy ratios could likely decline over time. In the last two years, with economic scarring during the pandemic, the GFIs’ balance sheets must have moved. Only the GFIs and the BSP examiners are in a position to confirm their current financial condition.
For another, on the same day that the GFIs sought a reprieve from the banking regulators, Malacañang issued Executive Order (EO) 43 reducing the percentage of net earnings the Landbank should remit to the National Government. The EO sliced it from 50% to 0%. The DBP is expected to seek the same privilege. The law on dividends stipulates that GOCCs and GFIs should remit at least 50% of their annual net earnings to the National Government.
With the provision that the President may alter the rate upon the recommendation of the Finance Secretary, we can infer that the latter must know something we do not know at this point. Of all the cabinet members, it is the Finance Secretary who should be the first to object because under the law, those dividends are the income of the General Fund. He should know that every peso counts in generating revenues; the fiscal deficit already stood at 4.8% of GDP for the first six months of 2023.
He would have to compensate for this waiver either through the imposition of higher taxes, higher borrowings, or both. Yes, there seems to be an implicit recognition that fiscal sustainability is at risk, but come hell or high water, the order stands that MIF should be launched by the end of this year.
Malacañang should be able to face the truth, and the truth is that the Philippine economy succeeded in growing without interruption from 1999 through 2019, even snubbing the debilitating effects of the Global Financial Crisis, without a sovereign investment fund. We earned successive credit upgrades and grabbed investment credit ratings with positive outlook without a sovereign investment fund. We freed ourselves in 2006 from 44 long years of IMF stewardship without a sovereign investment fund.
It simply is not true that we need the MIF to attract foreign capital, to diversify our investment, to mobilize resources to fund infrastructure and sustain economic growth and mitigate poverty. Its seed capital is from the general government fund; there is no new money. We are investing from a position of capital shortage.
If this whole exercise would end up implementing the MIF anyway, the President would have missed the opportunity for rectifying one of the key weaknesses of his Administration, the others being inflation, generating jobs, and addressing poverty and inequality. The challenge is to restore some rationality in the use of the national budget. We cannot overthink enough the Maharlika; it involves public money.
Unfortunately, the initial signs are pointing in that direction. Before he flew to Saudi Arabia yesterday, President Marcos was quoted saying “we have found more improvements we can make… we are still committed to having it operational by the end of this year.”
Despite the significant erosion of his popular support, the President can now engineer a recovery and one way of doing it is to prolong the suspension of the Maharlika launch and ask Congress to repeal RA 11954. If done with the same passion and drive that helped steamroll it through Congress, the President can redeem himself and prevent doing a disservice to the Filipino people. The petitions against its unconstitutionality at the Supreme Court will be rendered moot and academic.
The Maharlika fallout was quite serious, but now we are given the chance to pick up the pieces.
Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.