Maharlika Fund current version is acceptable – Medalla

The current Senate version of the proposed Maharlika Investment Fund (MIF) is more acceptable than previous design, particularly since it will not touch the country’s US dollar reserves, according to Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla.

“It’s very clear that the reserves will not be a target for the funds. It’s very clear our regulations will not be affected,” Medalla said late Friday, Feb. 24, in the sidelines of the BSP’s annual reception for bankers.

“It’s gotten to the point where they are now focusing on the quality of spending and in fact their biggest goal now is to get credible partners,” he said.

Medalla said the current MIF version is “acceptable” because lawmakers and the architects of the MIF now realize that “the role of the fund is to improve the quality of spending (since) the tendency of Congress (and congressmen) is to spread the butter too thinly.”

The BSP chief favors recommendation to tap the multilateral organizations such as the Asian Development Bank and the World Bank’s private sector arm for the MIF’s investors.

“They (should) get the multilateral (institutions). Highly well-reputed. They’re already moving in that direction,” he said. Specifically, ADB’s private sector units and World Bank’s International Finance Corp. (IFC) can come in.

“They’re probably waiting for the fund to meet their own requirements,” said Medalla.

He said that since some of the investments are meant to reduce carbon emissions, both ADB and the World Bank would want to be part of it. “It’s very clear that the fund will focus on a few things (such as) private sector projects that will reduce greenhouse gasses. I’m sure that will attract foreign financing to the extent that the carbon credits can be given to them,” said Medalla.

Medalla also said that now that both the Social Security System and the Government Service Insurance System are off the table in MIF discussions, the state-owned banks, Land Bank of the Philippines (Landbank) and Development Bank of the Philippines (DBP), can have more substantial talks on how to go about funding the MIF.

“Landbank and DBP – what they are doing is that they are just transferring the buying of securities to this one, it will not even affect lending. Of course one can argue that if DBP and Landbank use the money that they’re initially planning to use to buy government securities, the NG (National Government) has to buy new buyers, right,” said Medalla.

If the current Senate version is passed, BSP will be mandated to contribute 100 percent of its declared dividends in the first two years of the wealth fund. While this postpones the BSP’s P200 billion recapitalization by at least 14 years, Medalla said the BSP can handle this because balance sheets are on the strong side. As of end-October 2022, the BSP posted net profits of P88 billion.

Under the revised New Central Bank Act, amended in 2019, the BSP has a higher capitalization of P200 billion versus its old 1993 charter which only allowed for P50 billion. The new BSP law however states that the additional P150 billion will come from its own dividends. Since the proposed MIF law will divert these dividends, the BSP will continue to have to work on a mere P50-billion capitalization until it is freed by the wealth fund.

Meanwhile, DBP will contribute P50 billion to the Maharlika Investment Corp. (MIC) to be created, while Landbank will put in P25 billion.

The government financial institutions (GFIs), including BSP, will fund the MIC which will mobilize and utilize the investment fund to maximize returns. The GFIs will later increase their contributions to the MIC.

To make sure the two GIFs will not collapse due to unforseen events in the future, the BSP will extend regulatory relief measures for their continued financial soundness while contributing to the fund.

The BSP for the first two years of the MIF or MIC will remit 100 percent of its declared dividends to the fund. In the succeeding years, the BSP will remit 50 percent of its declared dividends to the fund while the remaining 50 percent will go to the NG until the increase in the BSP capitalization has been fully paid. Thereafter, the BSP will remit 100 percent of its declared dividends to the fund.

Medalla said the BSP will back up Senate Bill No. 1670 or the Maharlika Investment Fund Act, for the establishment of an independent fund that “adheres to the principles of good governance, accountability and promotes economic development”.

Previously, when the wealth fund was first being discussed in the Lower House, Medalla was cautious about early proposals of diverting the country’s US dollar reserves to fund the MIF.

Medalla was worried that diverting the gross international reserves will seriously hamper their defense of the peso in case of external shocks or hits to the peso, as what happened in 2022 when the local currency depreciated to its record weakest of P59 vis-à-vis the US dollar. The BSP sold more than $14 billion of its dollar stock to stop the peso from breaking past P60.

Medalla also said the BSP is not an investor of the MIF or MIC since the dividends paid by the BSP belongs to the government anyway. He said it is the government that is investing in the fund, not the BSP.