Bounded rationality?

If they were dead serious about getting the Maharlika Investment Fund (MIF) bill signed by the President and announced during the forthcoming State of the Nation Address in late July, our economic managers should have refrained from issuing their eight-page joint statement. Now going through legal brushing in Congress, the bill was trashed in various forums and parliaments of the street. The UP School of Economics professors joined the choir with their 25-page discourse challenging the premises and the fundamentals of doing a Maharlika Investment Fund.

The joint statement, without exaggeration, leaves readers with more questions than answers it sought to provide for the skeptical among us.

Since we are all in this together, groupthink should have produced better results. Is the MIF bill truly consistent with the 8-Point Program of this Administration, the Medium-Term Fiscal Framework, and the Philippine Development Plan 2023-2028?

Hundreds of billions of pesos have been earmarked for the 8-Point Program covering food security, improved transportation, affordable and clean energy, healthcare, education, social services, sound fiscal management, and bureaucratic efficiency from the budget for the year, and presumably for the next few years.

To the extent that part of the budget will be used to fund the MIF, reason tells us that for these programs to continue receiving their just share, the National Government (NG) will either increase taxes or borrow more. Since we wish to sustain economic growth and avoid economic scarring from the pandemic, we don’t expect the NG to reduce public spending.

How then this will promote the 8-Point Program escapes us.

During the presentation of this program before the new Cabinet last year, it was claimed that “in the near term, we will address the most pressing issues faced by our people: rising prices, socio-economic scarring from the pandemic, and ensuring sound macroeconomic fundamentals.” If we wish to address these urgent social issues, this is not exactly the best time to divert public funds from them. The MIF is not the best vehicle because it is weak on funding sources. Nothing wrong with focusing on job creation, quality jobs, infrastructure, human capital development, or even the digital economy. But the issue is more of opportunity cost, it’s a question of today’s survival against tomorrow’s speculative higher returns.

In the first place, and this is again an old issue, we have no surplus funds to invest at this time.

In particular, the MIF bill does not exactly promote the 7th point, sound fiscal management, because it mandates Congress to invest the MIF virtually with the power over the purse. Not only will MIF be deciding on the use of public funds, but it will also determine the disposition of their returns. This is a clear violation of the budget process enshrined in the Constitution.

Neither does the MIF promote the 8th principle, bureaucratic efficiency, because it creates another layer of the bureaucracy with clear duplication of functions. As also pointed out by the UP professors, MIF will be doing part of what the National Development Corp. is doing in terms of investing for national economic development. The founder GFIs are also investing on their own account to spur development. MIF could also be encroaching on the National Economic and Development Authority (NEDA) Board functions in terms of investment cherry picking and programming.

Make no mistake about this, but we welcomed the rollout of the Medium-Term Fiscal Framework (MTFF) with congressional support last year as it could likely anchor market expectations and encourage more investment flows. It very much established the government’s commitment to both growth and fiscal sustainability.

But again, the proposed diversion of funds to cover the financial requirements of the MIF could pull us back because there are many dark clouds of uncertainty about the prospects of the MIF.

First, how this P500-billion fund could outperform those trillion-dollar sovereign wealth funds which lose money now and then should be explained. During this period of sustained volatility in the global markets, it is tough to justify that a mere consolidation of funds could bring in higher returns. Since there are opportunity costs involved with fund diversion, the MIF is challenged to exceed what the funders could otherwise realize on their own. With the looming increase in taxes and borrowings, there is a great chance our fiscal targets might be compromised.

Plus, and we should not forget this — the MIF may incur debt as part of its corporate power. It may choose to issue bonds, debentures, and securities. Since it is a public entity, should it go into distress and be unable to repay its obligations, its liabilities may have to be shouldered by NG.

In my column in another broadsheet yesterday, we wrote that MIF could totally change the equation of fiscal responsibility in the Philippines. If this controversial bill is signed into law by the President, it could send a different signal to the market. The kind of fiscal consolidation that the MTFF is envisioning could turn out to be more contractionary than expansionary.

The President should be advised by some independent legal minds about this real risk to his leadership and government.

What about the MIF’s consistency with our Development Plan?

In their opening statement, the economic managers argued that the MIF operationalizes the Plan, “specifically Chapter 11.2 in which it is stated under Outcome 4 that one of the strategies included is to ‘diversify and explore alternative sources of financing…new instrument formats will also be explored to reach new markets and investors.”

Even under the assumption of bounded rationality, it is easy to see that the MIF does not constitute “an alternative source(s) of financing.” It is to be supported from existing funds of the public sector. MIF is adding nothing. In fact, it even sequesters part of the budget that should otherwise go to those projects in the 8-Point Program. If at all, it is an alternative disposition of public funds.

We don’t know if the allowable investments as contained in Article IV of the MIF bill may be considered new ways of wealth creation: “cash, foreign currencies, metals, other tradeable commodities… loans and guarantees to corporations and joint ventures; and other investments with sustainable and developmental impact.”

Many of them are known investment vehicles; nothing is new. Loans to corporations and joint ventures are scary. Big sovereign wealth funds must have known all these investment vehicles and yet last year, they lost billions and billions of dollars.

What is it that the incoming management and board of MIF would know that those trillion-dollar wealth and investment funds would not know? What is the guarantee they would never lose public money or pension funds?

The joint statement also made the point about safeguards, and they are considered enough. The Santiago Principles prescribing best international practices for operating sovereign funds are only as good at the sovereign fund’s adherence to them. The Commission on Audit will not be too useful here because its audit is to be done once every five years. All board members are to be appointed by the President including the independent directors. This being the case, even the independence of the board-appointed risk management and investment management committees may be open to question. This basic issue of governance explains the downfall of many sovereign funds in the past including the cautionary tale of Malaysia’s 1MDB.

Finally, Argument 8 of the joint statement commends the Senate for trying to protect pension funds. This is not accurate for in the version prior to the final one, Senate actually inserted another provision that would allow pension funds to invest in the MIF. In the final version, the absolute prohibition was maintained against pension fund investment into the Maharlika fund. But we hear some dissonance. Some Senate officers and members of the cabinet have started to clarify that pension funds can still invest, in the projects where the Maharlika will choose to invest in, rather than investing in the MIF itself.

It is too coincidental that these statements have a similar logic, and the drift is unmistakable. The MIF needs the SSS, GSIS, PhilHealth, Overseas Workers Welfare Administration, and the Philippine Veterans Affairs Office.

Even the letter of the law cannot protect the private money of our people.

Even for us with bounded rationality, the MIF, based on these flaws, would hardly qualify as “good enough.” On the other hand, decision makers may be restricted by a variety of constraints, not the least of which is wrong information.

The President and the rest of the Filipino people deserve more time and more complete information before we plunge into this new brave world of investing our scarce public funds.

Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.