Maharlika fund ‘defective, poses serious risks’ to economy – UPSE faculty members

Metro Manila (CNN Philippines, June 7) — Twenty-one faculty members of the UP School of Economics (UPSE) have urged President Ferdinand Marcos Jr. to “seriously reconsider” signing into law the Maharlika Investment Fund (MIF) bill pushed by his administration as they warned it could put the Philippine economy at risk.

In a discussion paper released Tuesday, the economics professors voiced their “grave concerns” on the sovereign wealth fund, dismissing it as “still beyond repair” despite hurdling both chambers of Congress.

They presented six arguments against the MIF, which lawmakers expect to send to the palace this week for Marcos' signature.

“We find that the MIF violates fundamental principles of economics and finance and poses serious risks to the economy and the public sector — notwithstanding its proponents’ good intentions,” the professors said.

They initially raised the issue on MIF’s “lack of a clear focus” as lawmakers want to use it to invest in a wide range of assets, including capital markets and socioeconomic development projects.

As sovereign wealth funds have gained traction across the world amid its potential to deliver global investments, the UPSE faculty members said the idea has expanded to include other classifications such as sovereign development funds and strategic investment funds.

The lawmakers' failure to clearly state the MIF’s goals, however, may violate Principle No. 2 of the Santiago Principles, which states that “the policy purpose of the SWF should be clearly defined and publicly disclosed.”

“Clarity of goals is essential for any new SWF (sovereign wealth fund),” the professors said, citing that the proposed measure vowed to adhere to the Santiago Principles.

The faculty members also said the “confused goals” resulted in the bill inadequately articulating and taking into account "several implications of the fund’s dual-bottom line objective.”

They noted that the planned MIF is “not aligned” with the approved Philippine Development Plan 2023-2028 nor the medium-term fiscal framework.

“Without anchoring the MIF on specific long-term development objectives, the MIF (especially if it is large enough) may pose macroeconomic risks and become prone to exhaustion when the political environment is unstable or incumbent officials prioritize short-term goals,” they explained.

They likewise questioned the MIF’s target to finance development projects, saying it may “render redundant” existing government programs.

The measure is also “vague” about expected financial and economic returns, they added.

The final version of the bill’s proposed ways to jumpstart the MIF “stand to erode the fiscal situation of the country, beleaguered as it already is,” the professors said.

Citing the country’s mounting debt and budget deficit, the faculty members see the possibility that the MIF may “worsen rather than abate the country’s fiscal situation.”

“The lack of any surpluses necessarily forces the MIF to scour money from other agencies and corporations of government, posing risks on, say, state-run banks and even the BSP,” they said.

Under the proposed bill, the Maharlika Investment Corporation (MIC) will get its initial capital from the following:

— Land Bank of the Philippines (₱50 billion)

— Development Bank of the Philippines (₱25 billion)

— National government (₱50 billion)

The contributions from the government would come from the BSP, Philippine Amusement and Gaming Corporation or Pagcor, properties, real and personal, identified by the Department of Finance, and other sources.

The professors also noted “red flags” hounding the MIC, describing it as “a poorly designed governance structure,” which can make it vulnerable to “political interference, mismanagement, and corruption.”

They said the best practice is “the board should be led by an independent director with most members unaffiliated with the government sponsor or owners.

Other issues raised include uncertainties and economic headwinds that may weigh down private investments.

The faculty members said that SWFs across the globe have “suffered huge losses” lately.

Calling it “defective,” they stressed that the government’s focus on the introduction of the MIF “has diverted attention from more vital and urgent national agenda that the administration itself has rightly identified, notably the need to reform the retirement and pension system for military and uniformed personnel.”

Assistant professor JC Punongbayan said the UPSE is also "disappointed" with the economic managers of the President who were former professors of the institution.

Speaking to CNN Philippines' The Final Word, Punongbayan said the flaws in the MIF bill are "so inherent" that it should have been flagged by UP doctorate-wielding economists.

Meanwhile, Albay 2nd District Rep. Joey Salceda, who also chairs the technical working group on the MIF bill, responded to the criticism and said the critique poses a "false dichotomy."

"So, it's mainly a development fund, and if it takes on the characteristics of an investment fund in some respects, it does so only because it necessarily has to be involved in the financial markets. The bill makes clear that investments in financial instruments are means to an end, not an end on their own. The true goal is socioeconomic development," Salceda explained.

Salceda also said the fund does not use a "double-bottom line approach," which takes into account both financial profits and socioeconomic outcomes as corporate objectives.

The Albay representative said the MIF's priorities would be stated in the President's upcoming State of the Nation Address and would provide "concrete policy direction for the Fund."