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BSP bucks inclusion of GIR in wealth fund

Lawrence Agcaoili – The Philippine Star
December 3, 2022 | 12:00am


Bangko Sentral ng Pilipinas (BSP) is strongly opposing plans to include the country’s foreign exchange buffer in the proposed P250-billion sovereign wealth fund. Aside from governance issues similar to what happened to state fund 1Malaysia Development Berhad (1MDB), BSP Governor Felipe Medalla said in an interview with Bloomberg Television another risk is that the inclusion of the country’s gross international reserves (GIR) in the proposed Maharlika Investment Fund (MIF) could affect the independence of the central bank.

“The other one is the extent that it could affect the independence of the central bank. For instance, if they say they will take the central bank’s dollars, then what will we use if the reserves are reduced because they have been taken to the sovereign wealth fund? We’ll have less ammunition the next time there is international volatility that is related to the peso and the dollar,” Medalla said.

The GIR is the sum of all foreign exchange flowing into the country, including remittances from overseas Filipino workers (OFWs), and serves as buffer to ensure that it will not run out of foreign exchange that it can use in case of external shocks.

The GIR declined from February to September and has remained below $100 billion for the past four consecutive months as the BSP has been intervening in the foreign exchange market to smoothen the volatility, especially as the peso hit an all-time low of 59 to $1 several times last October.

The peso has bounced back to the 56 handle amid the series of rate hikes by the Monetary Board and its active intervention in the foreign exchange market to smoothen the volatility.

“My personal view is unless we are compelled, we should not. But I’m a law-abiding person; if the law says we will, we will,” Medalla said.

Former Malaysian prime minister Najib Razak has started serving a 12-year sentence after his conviction on charges related to a multibillion-dollar graft scandal involving state fund 1MDB was upheld.

Investigators said some $4.5 billion was stolen from 1MDB – co-founded by Najib during his first year as prime minister in 2009 – and that over $1 billion went to accounts linked to Najib.

“To me, the experience of 1MDB Malaysia is the biggest risk. Even if the current guys are OK, will the guys five years from now still be OK? To me, it’s a governance issue,” Medalla said.

During the Kapihan sa Manila Bay forum last Wednesday, Finance Secretary Benjamin Diokno pushed for the establishment of a sovereign wealth fund with safeguards to protect the hard-earned money of investors.

Diokno said the proposed sovereign fund was conceptualized when he was still governor of the Bangko Sentral ng Pilipinas (BSP) “to take care of the future generations of Filipinos.”

“We have to set aside for the future,” Diokno said.

Countries with sovereign wealth funds include Norway, Singapore, Australia and recently Indonesia.

The House of Representatives through House Bill 6398 filed by Speaker Martin Romualdez and the President’s son Rep. Sandro Marcos calls for the establishment of the sovereign wealth fund to be supported by pension fund managers Government Service Insurance System (GSIS) and Social Security System (SSS) as well as state-run financial institutions Land Bank of the Philippines (Landbank) and Development Bank of the Philippines (DBP).

Under the bill, the four institutions are mandated to invest equity with a combined total of P250 billion to start up the fund. GSIS will provide an initial investment of P125 billion, P50 billion for both SSS and Landbank and P25 billion from the DBP.

Diokno said the section in the proposed law on the use of foreign exchange reserves that includes remittances from overseas Filipino workers (OFWs) is still being threshed out.

“That is the section in the law that still has to be threshed out. Let us just wait for what will be the final version of the bill and see how they will formulate this,” he said.

According to Diokno, we should benefit from OFW remittances because that is the closest to a natural wealth that we have.

Aside from the gross international reserves (GIR), other possible sources for the fund include royalties from mining, proceeds from the auction of bandwidth, among others.