Idled

By the latest reports, the Palace has suspended the activation of the Maharlika Investment Fund (MIF) pending restudy of its implementing rules and regulations (IRR). All the flaws of this concept now come into sharper relief.

All those conceptual flaws ought to have been evident from the start. An investment (or sovereign) fund is a good idea only if government incurs windfall revenues, most usually from the exploitation of natural resources. The Norwegian sovereign fund uses windfall revenues from that country’s North Sea oil revenues. So do the equivalent funds of Middle Eastern oil producers.

We do not have such windfall revenues that may be parked for long-term investments to benefit future generations. What we have is a government suffering from chronic budget deficits and burdened with heavy debt obligations. The peril in moving scarce funds into a sovereign investment fund – whose usefulness lies in the ability to make long-term investments – is that this would cause immediate capital shortages.

Initially, proponents of the MIF wanted to suck money out of the pension funds. That was a shaky proposition. These funds belong to the members of the SSS/GSIS. Our pension funds have tenuous actuarial life expectancies.

The proponents decided to take the money only from the two government banks and the BSP. Taking money from the BSP could be the subject of legal challenge.

All the frailties of the MIF concept notwithstanding, the supermajorities of the administration in both chambers of Congress steamrollered the concept into law. There was hardly any consultation. Opposition to the MIF from among the economics and business communities was nearly universal.

This administration turned a deaf ear to all the protests. It was as if the ruling faction had fallen so madly in love with a faulty proposition it was willing to expend political capital to make the flawed concept law.

And law it did become – with large majorities in both chambers. This was a stunning demonstration of political will unguided by any sense of statesmanship.

No administration legislative leader stood in the way of enacting a flawed concept. None of the executives of the financial institutions to be severely affected by contributions to the MIF – the BSP, the LBP and the DBP – raised their concerns loudly enough. Or resigned their posts when the flawed concept was made law.

Now we reap the grapes of wrath. The LBP obediently turned in its P50-billion “contribution.” The DBP turned in P25 billion. We are not sure what the BSP has done so far.

Having submitted to a misguided law, both the LBP and the DBP now find themselves with less than the minimum capital required to operate. They were constrained to seek BSP exemption from the minimum capital requirement. Ironically, the BSP itself could have less capital than it needs should it remit its “contribution” to the MIF. The regulator will be as guilty as the regulated.

These are volatile times. The BSP needs every peso it can get its hands on to ensure the stability of our currency and fight inflation. The problem heretofore was that our central bank did not have enough capital to do what it must do. After it remits its “contribution,” it will have even less capital. That makes the peso a target for speculation.

Should the BSP fail to ensure the stability of our currency because it lacks the capital to do so, every Filipino suffers the consequences. Not in the far future but today.

Should the LBP and DBP fail to get exemption from the minimum capital requirement, both should stop lending money. All the medium and small enterprises who depend on financing from the government banks will suffer because of this. The entire economy slows down when the government banks stop financing. Not far in the future but today.

Should the government banks get an exemption from the capital requirement, an uneven playing field is created since private banks do not get the same treatment. Instead, our banking system will be forced to give up business opportunities in observance of the mandatory reserve requirements.

Responding to the emerging capital crisis, the Palace exempted the LBP from paying government its required dividend this year. That means the budget deficit will be larger and the propensity to incur more debt stronger. Nothing was said about the DBP.

Now the Executive Secretary says the activation of the MIF will be suspended to enable a review of the IRR. But the fault is beyond the IRR. It is in the concept of putting up a sovereign investment fund itself at a time when government has no cash to spare.

What happens now to the P75 billion “contributed” by the LBP/DBP? In banking, time is a cost. The funds are idled while government figures out a way to operate the MIF. No institutional investor has jumped into this fund to help create enough magnitude to make it viable.

Without a certain magnitude of capital, the MIF cannot even cover its cost overheads. It will be a drag on the economy rather than an engine of growth.

Besides, the capital markets are in a doldrum. The bears rule the day.

Last week, investors demanded higher returns on government bonds. That means our public borrowing will cost a lot more.

There is a price to pay for stupidity. In this case, it will likely be a ratings downgrade for imprudent fiscal management.