Category: economy

Oil policies, failed thinking

Watching aghast the latest from Trump theater that has the US Navy preparing to blockade the Strait of Hormuz this Monday to prevent ships “entering or departing” Iran, and unsurprised by Iran’s promise of a “forceful response”. Who is writing this insane script unfolding kayâ? The one thing we can be certain of is that things are gonna get very much worse before they get better. Especially here at home where moves to repeal, or at least amend, the Oil Industry Deregulation Act of 1998, the better to serve public rather than private-profit interests, seem to be at a standstill. “Where’s the problem?” tanong ni Sonny Africa, sabay sagot: “It’s in the skewed priorities. Even amid a massive social crisis, the govt is still most concerned about fiscal targets, credit ratings, investment sentiment. And protecting corporate profits and billionaire wealth.” 

On the other hand, in the same vein, investment banker Stephen CuUnjieng had earlier sounded off on how a balanced and enlightened industrial policy is so very hard to do naman talaga and government just has to try harder: “It requires flexible and responsive policy and execution from the government, plus the private sector not always getting what it wants or having to do certain things to get what they want in exchange for national security and development. We failed at it before 1986, and it is hard to get right. So, what did we do? Instead of working harder to get it right, we gave up. “It is too hard, takes too long, so never mind” could be our national motto. [Oil policies and failed thinking https://www.manilatimes]

Not that anyone was listening? CuUnjieng’s April 10 column calls out the Pontius Pilates in government who wash their hands of oil policies, “chickening out and leaving it to the magical private sector” to deal with. Kasi, nasa “the best government is the least government” pa rin sila, which is so Washington Consensus, na matagal nang na-discredit. CuUnjieng rightly harps on the challenge to government to level up, learn from our mistakes and from the example of other oil-dependent countries that are so much better-prepared to address the needs of their people, especially the poor and middle classes, because of hard work, coordinated response, and critical thinking.

Hamlet’s soliloquy and economic Pontius Pilates
By Stephen CuUnjieng
April 10, 2026

“To be, or not to be, that is the question:/Whether ‘tis nobler in the mind to suffer/The slings and arrows of outrageous fortune,/Or to take arms against a sea of troubles/And by opposing end them.” Hamlet

Substitute “to be, or not to be” with “to think or not to think,” and I think we may capture the problem with more than a smattering of our economists, policymakers, and commentators on any pressing issue. Instead of taking arms against a sea of troubles and by opposing end them, they rely on the old, tried and proven failures like that of an over-40-year-old “Washington Consensus” that Washington has abandoned as “a promise that had not been kept” (Jake Sullivan, National Security Adviser on April 27, 2023), and bromides like, leave it to the private sector, and the best government is the least government (yet complaining where is government when they want something). Add their abandonment of industrial policy for laissez-faire, as it failed in our iteration and is too hard.

That is the equivalent of being an economic Pontius Pilate washing one’s hands of policymaking and execution and taking the lazy and unimaginative way by chickening out and leaving it to the magical private sector, even though it is public policy of the highest order and necessity that we are dealing with.

They lament we are at crisis on cost and availability of oil, fertilizers and more. Their solution is — no surprise — no regulation, as the government is too lousy and our politicians too populist and most naive, run to our taipans to save us? As if governance, rather than profit, is their reason for being. I am happy many taipans do CSR and are responsible players, but they are not policymakers or government! Nor their mission to engage in public policy. It is like asking a cardiologist to be an oncologist. Now what? Nothing except incoherent babble and not worked out thoughts, like defaulting to leave it to the private sector as always on any issue. It is clear that the times transcend the ability of what the private sector is equipped to deal with. We face daunting regional and global issues that even sovereigns are incapable of handling individually and are scrambling to work on collectively. Yet here we want to ask the private sector and taipans to take care of it! It is not easy public policy that is needed, but these are times and issues that demand it.

Yet that is not all, horrible as it is. They all trot out another cliché that a crisis is a shame to waste or some platitude to that effect. OK, what is their prescription of dealing with it? Some vague tired reform dating to the 1980s like open the economy to foreign investment without limits and remove restrictions on land ownership? Ano? How does that provide energy and food security? Didn’t that lead to shutting down of refineries and further imports of food staples? We have even less industry now, but lots of warehouses, cold storage, and logistics companies to feed the families of OFWs who hopefully don’t lose their jobs. The biggest job openings domestically will be delivery personnel in their “hugas kamay” vision for the Philippines. Brilliant.

If we are incapable of original and critical thinking, can our economic Pontius Pilates at least learn from what our immediate neighbors successfully did? And without being the teacher’s pet, to a multilateral panacea of removing any safeguards for local industry, and just open everything to unrestricted foreign investment. I need to remind readers of something I have previously written.

When these teacher’s pets and hugas kamay economic Pontius Pilates say look at say the US, Europe, Hong Kong and Singapore — they say they have no statutory limits on foreign investment and show how naïve and uninformed they are. First, there are limits, like transportation is limited to 40 percent foreign ownership in the US, and within EU to members in Europe. In all of them, regulators are allowed to disallow foreign investment if against national interest. Please look up CFIUS and their record. Even in the all-foreign- investment-allowed Hong Kong, regulators decide on your fitness, for example, to own a bank or open an investment bank or asset manager. When Cable and Wireless sold HK Telecom (their PLDT) in 2000, who could buy was vetted, and it was sold to PCCW (owned by Richard Li, son of Li Ka Shing). In 2006, when a group led by Macquarie wanted to buy it, they were told you are not going to get approval, as we are not convinced of your commitment to Hong Kong, given that you are relatively new to investing in Asia. That is reality versus accepting propaganda and marketing like the limited thinking teacher’s pets are.

On industrial policy, all countries got it partly wrong (even Japan and Korea), but stuck with it and improved as they knew manufacturing had to be developed and nurtured for sustained and broad economic growth and prosperity. You think Japan became successful at cars, appliances and electronics because they left it to the private sector and foreign investment? It was government policy set and implemented by the powerful MITI (Ministry of International Trade and Industry) and its successors. What they did was protect them as they grew, but made them grow to be globally competitive and abandon those which did not measure up, given a timeline to improve quality. You think China just let market forces and foreign investment make it the dominant player it is in processing rare earth minerals, renewable energy, batteries and electric vehicles? If you believe that, let me sell you some VHS tapes and Nokia phones. Or even the EU when they decided to challenge Boeing with Airbus?

To those who worry about capitulation to China on the Spratly Islands, well, what these economic Pontius Pilates are doing with their naivete and lazy reliance on failed over 40-year-old solutions that even its originators have abandoned is to me, the economic equivalent of surrender. Grow up and think critically with love of country and patriotism rather than be Pontius Pilates engaging in economic psittacism*. What a kakistocracy* among many of our supposed thinking class.

The author is an independent director of the state-run Maharlika Investment Corp.

  • Psittacism is the mechanical, repetitive, and meaningless use of speech or writing. Derived from the Latin psittacus (parrot), this term describes repeating phrases or jargon without thought or comprehension. It is often used in a pejorative sense, particularly in philosophy and literature, to criticize empty rhetoric or thoughtless repetition.
  • Kakistocracy is a system of government led by the least qualified, most incompetent, or most unscrupulous citizens. Derived from the Greek words kákistos (worst) and krátos (rule), it represents government by the worst people. It is often used in political commentary to describe corrupt or inept leadership.

 

 

Trump’s tariff threats

Donald Trump seems set on shaking up the global economic order (such as it is) with boundary-pushing trade policies, as in, the dreaded increase in import duties for certain countries. How might it affect us in the Philippines? Here’s a look-ahead post on what it means in the short and the long run, by econ professor Orlando Roncesvalles (@dumaletter.bsky.social) of Siliman U.

Letter from Dumaguete
December 19, 2024

TARIFFS GALORE
What happens next?

Tariffs and international trade are again in the news. 2025 will begin with a new administration in the United States that has promised its constituents a significant increase in import duties or tariffs. The proposed new tariffs are aimed at Canada, Mexico, and China. Tariff increases are also proposed for other countries that have declared a desire to undermine the role of the US dollar in the world economy.

The impact of tariffs

What do these tariff proposals mean in the short and long run? The long run is a helpful reference point, even if it takes too long. I say this despite a famous admonition by a very important economist (Keynes) that the long run won’t matter because we would be dead by then. It still pays to imagine that there is rhyme and reason, even in economics, when everything we might worry about will have done their ‘entropy’ thing and settled into a steady-state or stable equilibrium.

Let us imagine then the long-run effects of a large country such as the US enacting a substantial hike in import tariffs on its significant trading partners. Canada and Mexico have prospered after entering into free trade agreements with the US in 1974. Many observers view China’s phenomenal economic growth as partly due to its rapid exports since at least the 1990s and more so after China joined the World Trade Organization in 2001. The trade relationships of these three countries with the US give evidence of the benefits of international trade, even if governments attempt to ‘bend’ the rules to their advantage. Such rules cover trade tariffs.

A tariff is a tax. It is levied when goods cross national borders. Since 1945, the international community has negotiated tariff reductions or set up ‘free trade’ zero-tariff areas. This historical move toward liberalization is generally regarded as a good thing because we know that the historical alternative — trade restrictions and trade wars (when countries imposed tariffs and trade embargoes on each other during the interwar period of the 1920s to the 1940s) — was a nightmare. Noteworthy is an observation made in 1933 by an American historian (W. Y. Elliott) who saw in the emergent trade blocs and embargoes “the worst dose of economic nationalism that [the world] has ever seen. Worst because it will be deliberate; because the tools are at hand to make it more absolute than ever before; and because the conditions are present that will probably make the resulting dislocation of existing national economics more painful than ever before.” Sober minds already sensed the deep divisions between countries that resulted in World War II.

A tariff drives a ‘wedge’ between the world market price and the corresponding domestic price. For example, the US presently imposes an import duty of 25 percent on trucks imported from Japan. That means that the $20,000 price of a Japanese-made truck can rise to $25,000 in the US domestic market. The tariff ‘protects’ the American manufacturer from Japanese competition. Of course, such protection can go only so far. The demand for Japanese trucks in the US market also reflects their higher quality. Still, the tariff serves to shift demand toward US-made products.

But is a tariff inherently wrong? Ever since the time of David Ricardo, economists have recognized the desirability of free trade. Tariffs distort the natural incentives for countries to specialize in producing goods in which they have a comparative advantage. The accepted exception to this general rule is when tariffs promote overriding considerations such as national security, the promotion of ‘infant’ industries, or the mitigation of domestic ‘market failures.’ An example of a market failure is when there are large pockets of unemployment that result from free trade.

An interesting aspect of the theory on tariffs is that the size of the tariff-imposing country matters. If large, such a US TARIFFS 3 country can reduce world market prices when its increased domestic production of importables adds to global supply.

It follows from the discussion above that a large country can ‘force’ a fall in the world market price of a good. While this seems to be an argument for imposing tariffs, it carries the risk that similarly large countries would be tempted to impose retaliatory tariffs. The possibility of a resulting downward spiral of world market prices would, however, deter large countries from engaging in such a trade war.

A not-so-funny thing is that tariffs imposed by large countries may benefit small countries that would benefit from a lower price for imported goods. This ‘third-country’ effect may or may not be significant. It depends on how large the tariff increase is and whether the small country benefits from a free global market.

Other economists have come to similar conclusions. For example, a multi-country model employed at the Peterson Institute for International Economics (PIIE) suggests that Asian countries, including the Philippines, will likely benefit from new US tariffs.

The short-run scenarios

The short-run effects of significant tariff increases are difficult to divine.

Initially, US consumers will see price increases for imported goods, representing a one-time blip in inflation in 2025. But, unless tariffs continue to rise in later years, the effect on inflation should be transitory. (And yet, inflation can have a mind of its own. Central banks regard this in part as an insoluble problem of expectations. Inflation persists because the public expects it.)

There will be winners and losers from a new tariff. Domestic producers of goods that compete with imports will gain. Consumers of imported goods will suffer. In an ideal world, society could mitigate these gains and losses. A reduction in their income taxes would compensate the consumers of imported goods. The government could tax the profits of domestic producers.

In my view, such ‘rebalancing’ mechanisms are not likely to work smoothly. Consumers’ confidence will likely be shaken even if their income tax burden is reduced. Because consumption is a large part of aggregate demand, there would be a palpable risk of stagnation or recession following an initial period of stagflation. Indeed, the multi-country model used by the PIIE predicts declines in the trading volumes and national incomes of two countries that impose tariffs on each other.

The effect on the Philippine economy 

As noted earlier, Asian countries such as the Philippines stand to gain if they are exempted from the increased US tariffs. This could lead to a surge in demand for goods manufactured in the Philippines, potentially boosting the local economy.

Will the overseas Filipino workers also benefit? Their families in the Philippines can benefit from lower world market prices for Chinese goods.

Summing up and conclusions

The inflationary effects of new tariffs are negligible, especially in the long run, and the size of the US economy suggests that there would be a one-time fall in world trade prices.

A tariff is a tax, a part of ‘fiscal policy.’ What governments take, they can give back. The gains made by domestic producers can be transferred back to consumers through cuts in income taxes. Absent such redistribution mechanisms, a tariff amounts to a tightening of fiscal policy.

There can be severe consequences for the overall economy. A tariff increase can induce stagflation in the short run, depending on how central banks behave and how the public forms its price expectations.

We will likely get trade wars, which, as in the 1930s, will reduce the volume of international trade and usher in a global recession or even depression. A ‘silver lining’ to this grim scenario is that the bubbles in the stock markets and cryptocurrencies are more likely to burst amidst global deflation, which would be the more likely outcome after 2025.

One can almost wonder if tariffs are a modern example of a Faustian bargain. Or perhaps the policy issue can be seen in the saying, “Be careful what you ask for; you just might get it. In spades.”

Bigas, Koryente, Gasolina — pamahal nang pamahal

Good to know that we are not imagining it, that government’s inflation figure — 3.8% in April — hardly reflects the inflation that the common tao struggles with on a daily basis in terms of the increase in prices, year on year, of daily essentials rice, electricity, and gasoline,

‘IN-OUR-FACE’ INFLATION
By Orlando Roncesvalles
Letter from Dumaguete

Rice, electricity, and gasoline

Electricity bills can shock, like the live wires in the 220-volt outlets. Doomsayers will have a field day, and cynics will peddle conspiracy theories even as we experience de rigeur brownouts. We need a superhero to deal with a blooming power crisis. Hmmm. We need a cha-cha fix.

The Dumaguete MetroPost reports that Noreco I and II bills show residential electricity has reached P14 to P16 per kilowatt hour, up by P0.87 and P1.40 from the previous month. The news raises questions about affordability and whether alternative sources such as residential solar energy or ‘mini’ nuclear reactors are viable solutions. The latest editorial in the paper advocates energy conservation measures. It left out going to a porch or veranda with a nice cold cocktail. The better to forget.

The bill shock is a ‘perfect storm’ brewed from seasonal demand and a higher supply price. These two phenomena reinforce each other, leading to a ‘double whammy.’ A third whammy is on the way. Why? Because bad luck comes in threes. Surely, I jest. Keep your fingers crossed on two.

A national official blames “the pass-through cost from the power suppliers.” The pass-through cost shows up as ‘generation cost’ in our electricity bills. This raises a more challenging question: Why are generation costs higher? Noreco II explains that these costs follow a seasonal pattern, rising in the summer and falling later in the year.

But there is no denying that electricity prices have risen. For decades, the story behind electricity prices has remained complicated. Is there too little supply? Yes. Do the power producers compete to lower the price? A few players dominate the market. Is there a problem of red tape that inhibits the entry of more players? Yes. Has government regulation over distribution utilities cut the costs charged to the consumer? We’re still determining. Is the exchange rate a factor? Only sometimes, because the peso fluctuates. Are prices sensitive to imported inputs? Yes.

The inflation issue isn’t just related to finances. It is also psychological. We are creatures of habit. The P500 bill was yellow and comfortable. The polymerized blue P1,000 bill has now become more commonplace. The value of daily transactions has risen faster than monthly incomes. We wish we were like the Argentines who bravely lived with inflation. Or like Henry Higgins getting accustomed to Eliza Doolittle’s face in My Fair Lady. Some search for an antidote in the crypto rabbit hole. The economists say it’s just another tax we cannot evade. Pay it and forget it.

While the educated elite may find an uneasy peace with the official inflation rate (see below), the common tao struggles. He can feel the prices of rice, electricity, and gasoline. These three commodities — called necessities — figure prominently in his limited budget. A measure of inflation focused on these goods is one that we can label as ‘anecdotal’ or ‘memorable.’ The number we get will stick to our brain cells even if the official inflation number does not.

The year-on-year price increase for rice was 21% in May. Local well-milled rice sold for P51.42/kg, compared with P42.50/kg a year ago. For electricity, the local utility (Noreco II) set the residential power rate at P14/kWh, compared with P12.79 in May 2023. This gives an electricity inflation rate of about 9.5%. Gasoline in the Philippines sold for P64.40/liter in May versus P59 a year ago. The gas inflation rate is about 9%. A simple average of these inflation rates is 13%. This memorable inflation rate is unbearably high. (Interestingly, the official inflation rate is much lower at 3.8% in April.)

But what accounts for the disconnect between the low official inflation rate and the high one for the ‘survival’ commodities? One possibility is that the prices of other consumer goods have not risen much or may even have declined. Someone from the Philippine Statistics Authority can explain. A further explanation is that the prices of these three goods are very volatile.

Does the disconnect even matter? Yes, for government officials who have to decide on mandated wage levels. The same goes for political leaders with a support base in the C-E classes. These voters suffer the most with memorable inflation. Economic managers also have to pay attention to the disconnect. They may become complacent with the low official inflation and urge the Bangko Sentral to cut interest rates prematurely.

The disconnect and both types of inflation will inevitably disappear. This is because economists assume or expect the relative prices between various goods to stabilize in the long run. The question of how long before both inflations converge is nonetheless uncharted territory. The answer will depend on how persistent the short-run factors, such as ‘shocks’ and ‘policy mistakes,’ are.

Can we forecast the inflation rate for the three goods in the next few months?

According to economists at the World Bank, the global rice market has been tightening. This is due to a ‘Niño’ effect and to export restrictions by the major rice-producing countries. Unless the government decides to subsidize the retail price or reduce the import duty on rice, we are in for a rough ride. Proposals to allow more rice imports will do little to reduce the local price. But at least there would be supply. So, no long lines to buy rice.

The world oil market and the peso-dollar exchange rate drive gasoline inflation. Even if the world price were to stabilize, the peso has lately been falling. For thinking purposes, we assume that the exchange rate stays where it is. The so-called ‘base effects’ will give us the near-term inflation rate in this scenario. Base effects mean that the inflation rate is calculated using current prices (P64/liter) compared with the average June through August 2023 price of P63.8/liter. This means that we can project a zero inflation rate for gasoline. Good news!

Electricity is more of a mystery. Taxes and subsidies can shift the balance between demand and supply. So can rule changes for the major players in the evolving electricity market. The entry of solar energy has ramped up with technological advances and lower prices for solar panels. At the same time, it is still government policy to push for economic growth. The net effect on the price level is possibly a wash, similar to what we might project for gasoline.

Electricity pricing by Noreco II could stabilize at P14/kWh. The base effect suggests an inflation rate of 12% (from an average price of P12.47/kWh for June-August 2023).

An approximate ‘base effect’ inflation projection for the three products in the next three months would be around 8%. This is based on zero inflation for gasoline and 12% for electricity and rice. Such a projection assumes an unchanged peso-dollar exchange rate. I surmise that inflation will remain persistent, like a disease that requires a lifestyle change.

All is never lost. Containing memorable inflation is no pipe dream. We can do our civic duty by changing our bad habits. Rice makes us fat anyway. We can reset the thermostats on our air conditioners and walk or ride bicycles. Our local governments can build nice sidewalks and bike lanes. We can also pray that the peso will strengthen. Civics are good. Honda thought so.

Some suggest that the government should impose price controls or targets. Never mind that such policies require subsidies and new taxes. They can also result in shortages and long lines. Will that be politically correct? Will the voters in next year’s election care? Time will tell. Space doesn’t know.

The Stoics claim that what matters is the line between things we can and cannot control. Aside from a renewal of civic virtues, memorable inflation is beyond our human ken. That is the province of gods, statesmen, and legislators. The official inflation rate is less problematic. It will remain within the 2-4% target range that the Bangko Sentral has set. That promise is easy enough to keep, especially if memorable inflation dissipates.

_______________________________________________________

Author’s email: ORoncesval4@gmail.com; Twitter: @ORoncesvalles

Maharlika — everything, everywhere, all at once

Pasting this in full before it gets paywalled.

By Stephen CuUnjieng

SIGNED, sealed, delivered — it’s yours. Now what do we have with Maharlika and what will they do with it? I have previously said I am supportive of a national development fund. Preferably one like Indonesia’s, but at least the Senate improved on the House version. Still, would it be the way I would do it? No, but I am not the president or a senator, so what should the managers and board do with what we have?

It is clear as can be seen from the rushed document that there are even sloppy typographical errors that could have been cured with a little proofreading. In the section on the Bangko Sentral ng Pilipinas (BSP), the bill mentions “the monetary board” when it clearly should be “the Monetary Board.” Was that so hard to miss, and correct? What else might be there?

More important, there are contradictions or at least ambiguities, which should have been worked out, unless they were intentional. If the latter, then I would be worried. Sec. 2 on the “Declaration of Policy” seems to imply without being explicit that this is a national development fund from what the aims are. Yet there is no provision delineating this or limiting the breadth of what the Fund can invest in or where. Then in Section 14 on what the Fund can invest in, it reads to me like “Everything, Everywhere, All at Once.” Literally any type of equity, debt, or hybrid debt or equity plus joint ventures anywhere is allowed. That was carried over from the bill passed by the House. This does not seem in line with the “Declaration of Policy” in Sec. 2. If I was charitable, I could argue that this is where to park the money, starting with the initial P75 billion until they make the long-term investments but that is something the board and management may choose to follow, impose or ignore. If the latter, then it is no longer a national development fund but a regular fund with unlimited scope.

Short-term, long-term

Let us even argue that this broader scope of permissible investments is just “short-term” until the long-term investments are made. What if they lose value in the meantime or are so illiquid that they can’t be liquefied to fund the long-term investments? Why do I worry that Sec. 14 was not meant for just short-term investments, i.e. for the money on hand until the long-term investments are made? If it was just short-term, why would that section allow joint ventures and unlisted securities which are not liquid, short-term, or easily sold? If for the long term as well, then why is there no limitation on where and what the Fund can invest in? Again, it seems to be the old provision from the bill passed by the House and just carried over without clarifying what it meant, unless they really plan for it to be open-ended. Unless that was the intent and the Declaration of Policy was just principle that the Fund’s board and managers could comply with in whatever way they want to. So, in reality, full discretion. If so, then it really is the old House bill version with some statements of principle but no implementing or limiting provisions, which is an all-encompassing fund and not a national development fund. If that happens, then I worry and I don’t think that is a very good use of proceeds or worth the trouble and use of funds from the various government sources as Sen. Imee Marcos pointed out. Frankly, the government through existing entities can do that already, so why create something new and use profits of the Bangko Sentral (BSP) which are better used building up its own balance sheet? More on that later, but as Senator Marcos pointed out this is not coming from a windfall. The funds are being allocated away from other potential uses of funds by the DBP, LandBank, BSP and the national government.

Open-ended

On June 3, Sen. Mark Villar, the principal author of the bill which has become law, basically said it is both a general fund that can invest in anything and a national development fund. That means it is open-ended and really can be anything, unless the board and management choose to limit the Fund’s scope voluntarily. The board and management have the discretion to allocate what percent to a general fund and to the development side. Should they decide, that scope can also be changed by subsequent boards and managements.

Then there is the way the Fund is being funded. Most mutual funds that invest in public debt and equity are fully funded from the start and fully invest their funds in a short period of time. Unless they are open-end funds and raise new capital, they sell some of their holdings to buy other stocks or bonds. Most private equity firms that invest in unlisted securities (as at least what should be the national development fund side is targeted to do), usually get commitments but only call the funds when needed. What does that mean? Let us for example say XYZ Fund raises $1 billion in commitments from 100 investors who for simplicity commit $10 million each. At that start, there is no money in the fund, except perhaps an initial call of 5 percent or less for organizational purposes. So, in this case all that is put is $50 million. Then they decide to make a $100 million investment in a company or project, the Fund will receive 10 percent, or $100 billion, from the investors who will each send $1 million, or 10 percent of their commitment. This continues until the Fund is fully invested or the Fund reaches the end of its investment period. That way there is no worry about what to do with the money until the Fund makes the investments.

Here we are starting with zero targeted investments but P75 billion in funds. What will the Fund do with this pending use of proceeds? It also reads that this Fund will continue to be funded until it gets to P500 billion regardless of whether the Fund is making the envisioned long-term investments or not. Or is it profitable or not. Not the normal way it is done. For example, GIC manages the reserves of Singapore. Their private equity fund and investments in global private equity funds don’t send the money ahead except for calls for management fees and the like. They usually send the funds when investments are made. It is different if you are a windfall fund like Norway where revenues from their sale of oil is managed but this is not the case here. While sovereign funds are not limited to those with windfalls it is unusual when there is no windfall or revenue stream to fund ahead of commitments. Even more odd if what is envisioned is a national development fund and not a sovereign wealth fund, then as I put it, why can Maharlika invest in everything, everywhere, all at once? I suppose because it is a two-in-one fund, but those two are at cross-purposes.

Most problematic

Then there is the matter of using the profits of the BSP. Central banks, especially if you are not fortunate to be from a reserve currency like the US or European Community, are never big enough. Most prudent governments want to build the asset base of their central banks as fast and as much as they can to have the wherewithal to act in a financial crisis whether homegrown (like we had in 1983-1985) or regional (1997) or global (2008 and Covid and this year after the Ukraine invasion), which happen with regularity and more so recently. Under the BSP law, 100 percent of the profits of the BSP are returned as additional capital. Well, not anymore. The Senate version adds that “the monetary board (sic) can recommend to the president” that the investment of their profits to Maharlika be deferred if needed. Note, it is the president who decides, not the independent central bank and Monetary Board. Also, the nature of emergencies and crises is they are usually unforeseen, hence the need to prepare for their possibility ahead of time and not post its occurrence. When it happens, the central bank will have to use what resources it has and not be able to recall prior profits given to Maharlika or wait for the forthcoming profits and defer sending that if the president agrees. Frankly, this is the most problematic provision of Maharlika for me.

That analogously, is also the issue with using DBP and LandBank as funders. It lessens what is available to lend and by about 10 times the amount they invest in Maharlika. Why 10 times? Regardless of how they find it, what the LBP and DBP invest in Maharlika is charged to their equity. In their respective cases, initially P50 billion and P25 billion. Now a bank needs about 10 percent Tier 1 capital. So P1 in capital supports about P10 in loans and other debt instruments. As the Maharlika investment is charged to their equity, that means up to P750 billion less lending for both. Can the Bankers Association of the Philippines and BSP confirm if I am correct? I hope I am wrong but if I am right this is something to carefully assess and suggest the administration consider.

Especially given the clashing goal of merging LBP and DBP to make them bigger so they can be more efficient and lend more. How is that accomplished by taking away P750 billion in lending capacity up front, even while Maharlika has yet to find investments, and this will continue if the capital investments continue for these two banks.

Let me put it analogously. If it was too imprudent to let the pension funds like SSS and GSIS invest in Maharlika and are permanently barred, wouldn’t the same logic apply to the BSP given their need to constantly build up their balance sheet and resources to defend the peso and stabilize the economy as needed? Same with DBP and LBP if they are to fund infrastructure, development and agriculture. Why take away equity which will result in 10 times reduction in lending capacity?

Let me leave discussion of management, organizational structure and funding to another column. If we had to have a government-funded investment fund, I wish it was a national development fund, similar to the one Indonesia is trying out. That is not what Maharlika is. It could be implemented as a national development fund, but what is provided by the law is open-ended. It seems to be some hybrid fund whose direction is open to the board and managers but whose funding is set.

In the week since its passage, I have been listening to all the arguments of the government officials on how this will help Philippine infrastructure and so on. I agree if the Fund dedicated its resources to be a national development fund, it could. If that was the intent, then why did they set up a Fund that could invest in everything, everywhere, all at once? And why is that part not being explained?