MANILA, Philippines — A local think tank warned that if the current version of the Maharlika Investment Fund is passed into law, it could spread contagion in the Philippines’ financial system. To arrest a possible fallout, the Marcos Jr. administration could reconsider using state-run financial institutions as sources of funding as the Foundation for Economic Freedom sees it.
"It’s palatable as long as you remove government financial institutions as funding,” FEF president Calixto Chikiamco told Senate lawmakers and public officials present in the Wednesday probe.
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As it is, the current version of the sovereign wealth fund, as passed by House lawmakers, stated that the Land Bank of the Philippines and Development Bank of the Philippines would provide seed capital.
The LBP would be contributing P50 billion as initial capital for the Maharlika, while the DBP would inject P25 billion.
The Marcos Jr. administration is also eyeing the sale of state-owned assets, such as casinos and power plants, to bankroll the fund’s initial capitalization.
Exposure and risk
Despite this, the think tank presented a gloomy case of financial ruin if the administration pushes through with the current version of the controversial sovereign wealth fund.
"The funding source of the Maharlika is problematic," Chikiamco said.
He explained that if the seed money that will be provided by state-run banks is not guaranteed by the national government, it increases the systemic risk on the country’s banking system.
Chikiamco cautioned on the exposure of state-owned banks for a single investment since it could possibly breach prudential regulations for this kind of investment.
Still, if the government removes guarantees on investments from state-owned banks, it will spawn a host of systemic risks in the banking system.
"It will become wobbly, the market will perceive that and create contagion and financial panic," Chikiamco said. added.
The FEF called to mind the 1997 Asian Financial Crisis and the 2008 Financial Crisis as the best worst-case scenarios for financial contagion.
The former took hold when companies thought central banks would protect exchange rates, resulting in excessive dollar borrowing. While the latter caught on as American banks began a pattern of predatory lending, unfounded risk-taking, and exploited derivatives that led to the eventual collapse and bailout of investment banks stateside.
That said, Sen. Sherwin Gatchalian floated the idea of omitting government financial institutions from Maharlika’s list of funders.
Guaranteeing moral hazard?
Criticisms aside, the FEF said that they did not object to the wealth fund, but opined that Maharlika’s current version needs to be reassessed. That said, Chikiamco said that if the seed capital was indeed guaranteed by the national government, risks still abound.
"What is guaranteed, the principal or the income? In securities, there is no clarity that there’s such a thing as guaranteed equity," he said.
Finance chief Benjamin Diokno distanced himself from the idea of the state guaranteeing the seed capital for the Maharlika Investment Fund in December.
That said, Chikiamco also sounded off another concern that took centerstage in the Senate in the first Maharlika hearing. The think tank noted that guaranteeing the seed funding creates a moral hazard of sorts.
That "hazard" lies in the fact that parties who would be involved in the Maharlika Investment Fund are protected from any possible fallout from ill-timed financial decisions, according to FEF. In their words, it would "incentivize parties to be reckless."
"LBP and DBP will not need to do any more due diligence," said Chikiamco.
The Maharlika’s current version is also exempted from the government’s Procurement law and the Salary Standardization law. The latter would remove ceilings on how much an individual could earn in return for working at Maharlika.
The proposed sovereign wealth fund had a bunch of exemptions that would have been passed into law if the House’s version of the bill is to be enacted. The exemptions range from the absence of paying taxes on Maharlika’s funds, assets and properties, among others.
The Marcos Jr. administration rationalized this by explaining that they would need the discretion to be able to hire experts, such as fund managers, to run the investment fund.
Likewise, the fund’s surrounding gains from its investments are exempt from taxes on the local and national level.
The FEF asserted this would create an uneven advantage.
"We’re just arguing that the playing field should be level, under the bill, it is exempt from all taxes. It will have an unfair advantage over others…It’s not so much where money will go but the playing field will be uneven," Chikiamco said.