Monday, October 29, 2012

Time ripe for sovereign wealth fund

First of two parts
In less than a decade, the Bangko Sentral ng Pilipinas (BSP) saw its gross international reserves (GIR) surge from $15.02 billion as of end-2002 to $80.1 billion as of end-September 2012—with the country’s unsung heroes, the overseas Filipino  workers, steadily increasing their remittances.
This fivefold rise in the GIR, with three months to spare, has resulted in a very comfortable margin of safety for the BSP’s reserve-management push, since the end-September GIR already account for more than a year of imports.
Usually, a country’s reserve level should be able to finance three months of imports. For prudent levels, a central bank’s reserves of six months are seen as enough buffer for any financial hiccup that could hit the country.
Continued streaming of and expected yearly rise in the remittances from the OFWs have been fueled not just by an increase in the number of workers but also by a dramatic shift in the kind of talents employed.
This marked change in the jobs of the country’s  OFWs from household services to technical ones in information technology, hotel management, engineering  and oil drilling that account for more than half of our overseas workers has given rise to suggestions that the country put up its own sovereign-wealth fund (SWF) from the GIR.
One senior banker told the BusinessMirror that time is ripe for the Philippines to have its own country fund with the seed money coming from the BSP. The banker said the country could initially have $20 billion as start-up fund.
A $20-billion sovereign-wealth fund would mean that the country could still have a $60-billion reserve level, which is more than enough to finance 10 months of imports—well above the prudent level of six months of imports.
It could be used for some of the so-called PPP (public-private partnership) projects that the government has identified to jumpstart the economy. More than 15 PPP projects are on the pipeline and ready for bidding from foreign investors from China to Australia and Thailand to the United Kingdom.
With ready government funding from the SWF, foreign investors are immediately assured that the projects could be pursued with no need for those government guarantees that usually mean higher costs to be borne by Filipino taxpayers, such as the Metro Rail Transit system, which meant a 15-percent guaranteed return for  investors resulting in a subsidy so huge that the government had to bear the burden of added costs.
With its own sovereign-wealth fund, the government need no longer have to worry about guaranteeing unconscionably high-investment returns for investors. It would also mean the added advantage of making the government earn a bit more as a partner in PPP projects.
The buzz for an SWF for the country started with the continued surge in remittances that now average $1.5 billion a month.
The BSP data showed that it took seven years for the reserve level to double from $15.06 billion as of end-2000 to $33.75 billion in end 2007.
But it took just half that time for the reserve level to double again to $67.78 billion as of end-April this year.
The reserves topped $40 billion in July 2009, and raced to $53.75 billion in September 2010. Two months hence, the BSP reserves would hit $60.56 billion.
The need for the Philippines to have its own SWF is premised on the use of the excess reserves to fund economic activities that would result in substantial economic growth. One such activity could involve financing a new roadway that would  open up economic opportunities in Bangsa-moro, the territory that the country’s Muslim minority got under a recently signed peace agreement between the Aquino administration and the Moro Islamic Liberation Front (MILF). This roadway and other possible projects would catapult the Mindanao region in the Philippine South to economic pre-eminence fueled, no doubt, by peace dividends that would accrue as a result of the signing of the PHL-MILF agreement.

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