The Maharlika Fund: Last Two Minutes

Congress has only a couple of days to pass the highly controversial Maharlika Investment Fund (MIF) before the Congressional recess. Malacanang has certified the bill as urgent.

The bill is complex and unfathomable to the ordinary citizen and most legislators (the House passed the bill in 7 days which speaks to the quality of its constitutional oversight). Here are some FAQs to simplify the issues:

  1. Why the rush to pass the bill? There is no urgency to pass what could be a dangerous and unnecessary legislation. There is no immediate need to spend the money nor opportunities that will be lost. As it is there are hundreds of billions of stranded infra projects. The bill is seemingly being rushed to meet the President’s July SONA as it was rushed in December in the House to meet his World Economic Forum speech (where the MIF was barely mentioned). The Palace, our economic team and legislators cannot wait to get their hands on the money before the 2023/24 budgetary timetable derails their plans.
  1. What is the value added of the Fund? – Zero. The DBP and the Landbank have the resources and expertise to finance existing projects. Our economic managers have not offered an economic justification for the Fund other than that “it will accelerate infra spending, attract foreign investments and reduce poverty”. No evidence of any of this has been presented.

3. Is the bill constitutional? – 

  • As mentioned by Sen. Escudero the MIF has not proven its economic viability, a legal condition for such a GOCC to be formed; nor has one been presented by our economic team.
  • The bill may be questioned as an end run around the budgetary oversight imbedded in our constitutional checks and balances. The MIF can spend at will without Congressional constraints. 
  • There is a question whether the bill can mandate the DBP and the LB to invest over 50% of their combined capital in an enterprise over which they have no control and whether their respective Boards can approve the MIF investment without violating their charter and/or existing BSP rules.

4. What assures us the Fund will be profitable?

  • Nothing. Investing in infra projects like farm-to-market roads, dams and such do not produce profits and cashflows in the business sense of the word.
  • To cover the Government’s cost of money (say 6%) the Fund’s admin expenses (2%) and inflation (say 5%) the Fund would need to yield low double digit returns in nominal terms without a risk premium and high double digit returns when including risk. No Fund can do this without taking dangerous bets. In 2022 the Norwegian Sovereign Fund, the world’s biggest, lost $164 billion. What makes us think we can do better?
  • The Philippines has historically mismanaged all concentrated funds – witness the Coconut Levy, the Road Tax, Philhealth, etc.and GOCCs like Napocor and NFA. The MIF will likely go down the same path but now big time.
  • Our economic managers have not disclosed who will run the Fund. This is a significant disclosure when raising capital of any kind.

5. What are the dangers of the MIF?

  • As pointed out by JPE, Special Presidential Legal Counsel, the MIF by its size, concentration of risk and unconstrained mandate could present a “systemic risk” that could bring down our financial system. When fully formed the MIF will be over P500 billion and growing annually; bigger than the BSP, DBP and LB combined. Our economic managers say the Government will guarantee the latter’s exposures I.e. the taxpayer will have to foot the bill. Our credit rating will be downgraded to junk when this happens.
  • The MIF will be the mother of all pork barrels.
  • History tells us the MIF will be used for the business purposes of a few e.g. the Coconut Fund.
  • The MIF will be financed in perpetuity by PAGCOR and BSP dividends, privatization proceeds and anything else our economic team can carve out of already depleted Government resources.
  • The MIF will cannibalize monies badly needed for health, education and human resources. The military should question why its pensions are being reduced for budgetary reasons when money is being spent on an unnecessary, bloated and unconstrained fund. For the same reason, Government employees should question why our economic team is recommending to downsize and lay off their numbers by 300,000.
  • The MIF is expensive. Its starting administrative budget is P2 billion when it could be done for less than 10% of that. It is an example of things to come.
  • The Fund is essentially an unlimited and uncontrolled bank account for this and future Presidents. Its Board will serve at the pleasure of Malacanang.

6. So why the Fund at all?

  • It is way to by pass the budget accountability process by giving this and future Administrations a blank check.
  • It will be a platform to dole out political goodies.
  • Like the Coconut Fund the MIF will finance the business ambitions of a select few.
  • Our economic managers who will “oversee” the Fund will stand to personally benefit from per diems, performance compensation and insider information.

7. Who/what will be most negatively impacted by the Fund?

  • The military whose pensions will be cut in favor of the Fund.
  • Government employees being laid off in favor of the Fund.
  • The legitimate business sector with no political access.
  • Our credit rating. A credit downgrade will raise interest rates, weaken the peso, discourage foreign investments and limit access to international credit facilities.
  • Our social stability and security.
  • The Filipino people.

The Changing Political Landscape

The political ground is shifting.

Last week in a terse motion to an almost empty House GMA was unceremoniously demoted as Senior Deputy Speaker with no objections from House members even those supposedly allied with her. GMA was allegedly unaware this was coming down. It is said she had a big sister relationship with the Speaker. She was Lakas-CMD Chair emeritus, he President of the party. The Senior Deputy Speakership was largely a ceremonial title so ousting and humiliating her in the fashion it was done seemed designed to publicly flex the Speaker’s muscles.

The Speaker’s action was surprising since he is “simpatico” and hard to dislike.

Romualdez hinted GMA was planning a coup against him. The Speaker sought to diffuse the tension with photo opps of them smiling but the pain to GMA was obvious. Possibly adding insult to injury GMA was replaced by a fellow Pampangeno, Rep. Dong Gonzales.

In an expression of support for GMA VP Sara resigned from the ruling party Lakas-CMD. It is said the President and the Speaker were surprised by the Sara move.

The Marcos/Romualdez cousins have so far walked gingerly lest they be accused of following the foot steps of the old man Marcos. After one year in office they have gained in confidence and are prepared to push the political envelope.

It could be the President and the Speaker saw GMA as an itch on their side. GMA accompanied the President on most of his trips as adviser on foreign affairs. As such she may have over-spoken especially on the Marcos pivot to the U.S advocating instead a more neutral stance with China. The hand of the U.S. and Philippine Ambassador Babes Romualdez in the matter cannot be discounted.

The President and the Speaker may have seen GMA as a political threat. GMA continued to court her fellow Congressmen for example with trips to S. Korea. As a close ally of VP Sara she could derail the Administration’s plans for 2028 when Sara could run for President and win against the alleged budding presidential aspirations of the Speaker. GMA maintains a working relationship with ex-President Duterte who still is vastly popular.

The political maneuverings come at a time of a changing landscape. The economy has still to fully recover from the pandemic. Inflation especially in food continues to remain sticky. Despite assurances from our chief economic manager that our national debt is manageable and can be solved by growth, our debt is now approaching P14 trillion despite a 6% growth in 2022.

The food crisis is exacerbated by the corruption notably in agriculture which remains under the President as Sec. of Agriculture. When he assumed this office it was thought this is how seriously he wanted to reform this sector even if clearly he did not have the time for it. His critics now say he wanted the position to allow carte blanche for the cartels and hoodlums in the importation and distribution of key food supplies. They cite the mess in the importation of sugar.

Our fiscal space has narrowed with little room for the ambitious plans of this Administration. The economic managers are insistent on the establishment of the Maharlika Investment Fund even if this unnecessary and dangerous plan will cannibalize already depleted budgetary resources.

And then there is the matter of the Military Pension Plan. In a move to curry the military the last Administration doubled the salaries of AFP and PNP personnel, the latter would not have to contribute to their pensions unlike SSS and GSIS members, salaries of existing pensioners would be indexed to the current pay of existing rank; all off which will require according to DOF Sec. Ben Diokno an annual budgetary outlay of P850 billion or 16% of our current budget for the next 20 years; P9.6 trillion or about half of our GDP for unfunded pensions and an increase of 25% in our national debt by 2030 (Actually we will get there even without the pension problem). Diokno signed off on this plan as Duterte’s DBM Secretary yet it is he who now reports the pension plan is fiscally disastrous and needs to be walked back. This is creating turmoil among the military which remains the most important constituency of this and any Administration. The Labor Law prohibits the claw back of labor benefits. DND Sec. Galvez has warned about potential repercussions. This puts PBBM in a bind between a fiscal blow out or a discontented military which is the last thing this President needs at this point.

This mess will surely be exploited by those with an ax to grind and there are many.

There is Rodrigo Duterte who has still to fully recover from what he believes was the conspiracy by the Marcos’ to undermine his daughter’s presidential plans. He could well stir the pot knowing his daughter is only one step away from the Presidency. He maintains a strong political base especially among the military. He has a weekly radio broadcast. Some of his Cabinet have been retained notably DND Sec. Galvez. In short PPRD is not going away. The resignation of Sara from the Lakas-CMD could be the start of her political ambitions.

Sen. Imee is and always will be the sister of the President. She has been marginalized from critical decisions and people appointments and has at times railed at the “snakes” in Malacanang. She alledgedly has a strained relationship with the First Lady. Imee may have political ambitions for her son Matthew, Governor of Ilocos del Norte, so she may not want to be associated with the failures of this Government. Following the resignation of Sara there were media reports of increased “chika-chikas” between these two ladies which they have not sought to hide. Imee has in the past collaborated with Sara and GMA notably in the ouster of then Speaker Pantaleon Alvarez. This band of sisters has now re-united but this time with PPRD looking on. Think Charlie and his Angels. This is not a force to be disregarded in the 2025 mid-terms and 2028 presidential elections.

The business sector has remained quiet but there is increasing unease. Many of the big corporates are part of the Private Sector Advisory Council to the President so they are reclused from publicly speaking out. However what they see are the sprouts of crony capitalism so early in the new Government. The designation of three companies to import 440,000 MT of sugar even before the approval of the Government purchase order are signs of the growing power of insiders.

Business is also concerned with the establishment of the Maharlika Fund with its unlimited financial resources to compete with the private sector and buy up the country. The Fund was approved in record time by the House and could be the lynch pin that ties together the political and business plans of certain people in Government.

Speaker Romualdez and family recently bought 20% of EEI, a Yuchengco controlled construction company, possibly in anticipation of an infrastructure boom; and took a 51% stake in a media JV with the Lopez’ ABS-CBN perhaps preparing for the next elections. To his credit these were fully disclosed.

The President reportedly remains popular but his economic team not. Despite all the claims of a rapid recovery inflation, unemployment, stranded infra projects, agricultural distress, burgeoning debt, high interest rates and widening deficits remain problematic. Our economic team seems more focused on the Maharlika Fund than actually getting things done. They have been politicized to a dangerous degree, more interested in currying to the wishes of Malacanang than the demands of the economy.

Political events are now coming to the fore against a backdrop of economic headwinds and imbedded corruption.The President and the Speaker could well believe a 32 million mandate and an over 90% super majority in Congress gives them the power to do as they wish but there is the danger of over reach, push back and unintended consequences. The economic uncertainty will discourage the private sector investment needed to grow the economy.

We could be in, I am afraid, for a period of turmoil and further hardship for an already beleaguered Filipino.