Maharlika fund

‘A very expensive public brainstorming’: Senators grill Maharlika fund backers

Ralf Rivas

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‘A very expensive public brainstorming’: Senators grill Maharlika fund backers

MINORITY LEADER. Senate Minority Leader Koko Pimentel points out some flaws in the proposal Maharlika Investment Fund.

Senate of the Philippines

With feedback from experts that the proposed fund has no clear business plan, contentious funding sources, and presents a 'moral hazard,' Senate Minority Leader Koko Pimentel tells proponents of the Maharlika fund to straighten up

MANILA, Philippines – Senators questioned the financial viability of the Marcos government’s proposed Maharlika Investment Fund (MIF), as proponents struggled to justify its source of capital and present a clear business plan.

In a Senate hearing on Wednesday, February 15, Foundation for Economic Freedom president Calixto Chikiamko emphasized that in its current form, the MIF’s funding source is problematic.

Under the latest version of the proposed sovereign wealth fund, the bulk of the MIF’s capital would come from the Land Bank of the Philippines (Landbank) and the Development Bank of the Philippines at P50 billion and P25 billion, respectively. These amounts would comprise 25% and 33% of the total fund. Loans from government financial institutions that would be funneled to the MIF would then have a government guarantee.

Chikiamko highlighted two issues. First, government guarantees provide a “moral hazard” where “parties are protected from the consequences of their decisions.” 

The moral hazard scenario was observed in the 1997 Asian financial crisis, when companies assumed central banks would protect the exchange rate and therefore borrowed heavily in US dollars.

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“With its ability to access guaranteed loans from GFI and perpetual funding from the BSP, the MIF will become ‘too big to fail’ and pose systemic risk to the economy,” Chikiamko told senators.

Interestingly, the second scenario Chikiamko presented is what happens when loans are not guaranteed: it also increases systemic risk to the Philippine banking system. Devaluation of the MIF will translate to losses to the DBP and Landbank and would result in a “financial contagion and financial panic.”

‘A very expensive public brainstorming’: Senators grill Maharlika fund backers
Business plan

Given this scenario, senators Nancy Binay and Sherwin Gatchalian asked LandBank CEO Cecilia Borromeo: Will Landbank invest in the MIF, an entity with no historical track record, if it’s not mandated by law and does not have government guarantees? 

Borromeo said that in the absence of guarantees, Landbank would conduct “due diligence” and check the MIF’s business plan. 

“Our return on equity in government on Landbank was 14% last year. Projected return on [Maharlika Investment Corporation] to also be along that range,” Borromeo said.

National Treasurer Rosalia de Leon however emphasized that the 14% return on equity that Borromeo was referring to includes a one-off gain from its merger with the United Coconut Planters Bank in 2022. 

De Leon said that backers of the MIF are currently working on an investment strategy, noting that all projects funded would have to be approved by the National Economic and Development Authority.

She also noted that the MIF’s gains would be higher than inflation and the cost of borrowing. A conservative estimate is a 5% return, moderate gains would be around 7% to 9%, and a 12% return would be a best case scenario.

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Brainstorming with a price tag

But without a pipeline of projects, lawmakers are casting doubt.

“We don’t know where the funds will be used. For as long as we don’t have that comfort level, we are on the fence,” Binay said.

Senate Minority Leader Koko Pimentel gave the most scathing remark: “We observe the majority aligned with the administration and we see what you’re doing. You’re doing a very expensive public brainstorming.”

“I see the national treasurer sending instructions to the Landbank representatives to tone down the 14%. You should have discussed this beforehand that the figure involves non-recurring gains. Don’t use the 14% rate of return because there’s a part that’s non-recurring,” Pimentel said.

He also underscored that while proponents assured Filipinos that investments will be narrowed down to a list, a paragraph which allows “all other investments as may be decided by the board” effectively allows projects not on the list.

“There is a 2% cap on administrative and operating expenses. But there is section 17 which allows additional expenses so there’s no cap,” Pimentel said.

Pimentel concluded that the Senate should not allow the bill to pass in its current form, given the “disappointing” proposal.

“The assumption for administration-backed measures, [this is written] by the best lawyers and bill-drafters of the administration, and yet this is the result,” Pimentel said. – Rappler.com

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Ralf Rivas

A sociologist by heart, a journalist by profession. Ralf is Rappler's business reporter, covering macroeconomy, government finance, companies, and agriculture.