Finding the right timing for the Philippines’ first SWF

The Maharlika Investment Fund (MIF), signed into law on July 18, 2023, is the Philippine government’s first sovereign wealth fund (SWF) and the country’s attempt to pool investable funds of select government agencies and state-owned corporations. While the global economy is still battling high inflation and high interest rates, the goal of the MIF is to generate returns higher than what individual investment managers of each public entity is currently realizing.

Its timing is rather puzzling as developed economies like the US remain cautious in unwinding the series of interest rate hikes it fired off in 2022 meant to dampen inflation, which at the time peaked at 9.1 per cent while Philippine inflation reached 8.7 per cent. Higher Fed rates drove foreign investments away from developing nations like the Philippines given better yields, a continuing trend as of July 2023.

Implementing rules for the MIF, including the names of the nine-member board of directors that will make investment decisions over the Fund, have yet to be released. What we know so far is that Finance Secretary Benjamin Diokno will be the board chairman while presidents of state lenders, Land Bank and Development Bank of the Philippines, will serve as members. Six remaining board seats will be filled by President Ferdinand Marcos, Jr.

What’s in a name?

The World Economic Forum defines SWFs as a national pot of money “often derived from oil or other commodities” that allows countries to diversify investments by putting windfall resources into shares, bonds, property, and other profitable instruments. For MIF, the law states that profits generated will be spent on “high-impact infrastructure and development projects.”

However, this had been met with heavy opposition.

Critics feared the fund could be mismanaged through political interference. Unlike other SWFs straightforwardly named after the country, the name “Maharlika” (Filipino for “nobility”) traces its roots to the political slogan of Marcos’ father, former President Ferdinand Marcos, Sr. To assure the public and dissuade such fears, the President stated that he intends to appoint experienced wealth managers from the private sector to oversee the Fund.

Twin deficits

As seen in graph 1, the most successful SWFs are mostly funded by surplus government revenues and excessive investment exposures. The Philippines has neither.

Philippine officials have argued in favor of MIF by citing Indonesia’s SWF in 2021 – one year into the global COVID-19 outbreak – to illustrate that developing economies do not need windfall revenues to get started. However, Indonesia’s wealth fund fully relies on attracting foreign co-investors for financial resources to support domestic spending priorities, a stark difference from Manila’s strategy.

The MIF, which will start with a PHP 125-billion (about USD 2.3 billion) seed money, can potentially contribute to deepening domestic capital markets as it encourages increased investment activity and may give a timely boost now that foreign demand is virtually absent. Local and global private firms can also invest in MIF once it rolls out bond offerings to meet its PHP 500-billion capital stock, providing another avenue for players to participate in the Philippines’ bustling growth story. A deeper capital market will ease the country’s reliance on foreign borrowings in funding big-ticket infrastructure projects and will reduce borrowing costs, encouraging more foreign businesses to set up shop in the Philippines.

The faster rollout of development projects, particularly in public infrastructure as seen in graph 2, will be a boon for the local business climate should it be realized through MIF. The Philippines intends to keep spending at least 5 per cent of GDP on infrastructure development, and this requires trillions of pesos each year – a challenge to fund amid a persistent budget deficit that’s typical for a developing country. The pandemic has pushed the fiscal gap to 7.3 per cent of GDP (from 3.4 per cent of GDP in 2019) as the country took on more loans to fund emergency health expenses, and paying off these debts adds strain to the already tight public purse.

Efficiency is key

Much of the success of the MIF lies in the hands of its managers and, if executed properly, gives a chance to improve the state’s fundraising ability beyond imposing new taxes.

Of course, this entails a high risk, high reward scenario. Should it succeed, more funds are unlocked for public spending and confidence in the Philippines as an investment destination will certainly improve. But if the fund ends up mismanaged, state corporations providing seed capital are left worse off as their spending and investment activities are disrupted to no avail. This will mainly affect Land Bank (PHP 50 billion), Development Bank (PHP 25 billion), and even the Philippine central bank (PHP 50 billion).

The reputational costs would be hard to bear for a developing country trying to convince international firms to invest onshore – a herculean task at a time of a weak global economy that’s still reeling from the effects of the pandemic and continuing geopolitical concerns, hurting overall business sentiment.

Timing is key for the MIF’s success, with the perfect opportunity being when the Fed embarks on a rate tightening cycle and when inflation is back to acceptable levels abroad. Interest rates might peak soon, which in absolute terms might look good. However, we do note that the Maharlika fund is another example of governments increasingly interfering in the financial markets, the economy, and business in general by creating artificial demand for cash, which has never been healthy in the long run. 

This original article has been produced in-house for Lundgreen’s Investor Insights by on-the-ground contributors of the region. The insight provided is informed with accurate data from reliable sources and has gone through various processes to ensure that the information upholds the integrity and values of the Lundgreen’s brand.