Posted on November 22, 2012 03:53:58 AM
BY JOSE MARIA MARELLA, IDEA
WITH RECORD-HIGH gross international reserves (GIR) of $82.09 billion as of end October, analysts opine that the Philippines has become a prime candidate for setting up a sovereign wealth fund (SWF).
BW file photo
SWFs are established for various purposes such as diversifying national assets, insulating against volatile commodity prices, getting better returns on investment, and promoting national interests rather than letting the excess foreign liquidity sit idly or be siphoned off by foreign debt payments.
The first SWF, the Kuwait Investment Authority, was founded in 1953. It owes its inception to oil revenues, which it managed effectively towards eventually creating a well-diversified portfolio. This fund helped rebuild the Kuwaiti economy after the Iraqi invasion in 1990. By transforming oil revenues into income-generating assets, Kuwait was able to live off the fund for three years, using it to finance its national expenditures.
The Philippines, however, may not see the creation of one such fund in the near future because of a technical hurdle -- the Bangko Sentral ng Pilipinas (BSP) manages the country’s international reserves, but the creation of an SWF is not included in its charter. In a recent media statement, Deputy Governor Diwa Guinigundo maintains that the BSP is not mandated to create an SWF. Instead of setting one up, sound monetary policy is needed as domestic demand must pick up its pace for the economy to grow.
The Philippines’ sizable foreign exchange reserves, however, puts pressure on the peso to appreciate. If the peso were to appreciate even more, it could potentially have an adverse effect on key industries like outsourcing and manufacturing, eroding competitiveness against cheaper alternative hubs like India. Some analysts argue that adopting an SWF and investing these funds abroad could help ease pressure on the currency to appreciate.
A diversified portfolio also yields higher long term returns. United States Treasury bills are stable but low-yielding liquid assets, giving a return of only about one percent. But dividing liquidity between bonds and shares of stocks in foreign-owned corporations could yield returns of almost six percent. An SWF also helps insulate against shocks and crises; the very raison d'être of Asian SWFs was as a preventive measure against another financial crisis.
It has been argued that accumulating large reserves provides good protection from volatile capital flows. Over time, the policy stance shifted from passive liquidity management to profit-oriented liquidity management.
The Philippines could utilize an SWF to not only make the above-mentioned transition, but also to bolster its prospects of economic growth, particularly in infrastructure investment. For example, Malaysia’s Khazanah Nasional Berhad managed USD 17 billion in assets in 2006. It invests, both domestically and abroad, in utilities, communications, and infrastructure. The Philippines could also learn from these models in order to improve the current state of its infrastructure.
Other than the matter with the BSP charter, there are other attendant issues that need to be addressed in setting up a Philippine SWF. Such a move will warrant a great deal of political will and some openness to risk. Managing an SWF entails knowing portfolio management techniques that take into account probabilities of both gains and losses.
Also, managing the country’s international coffers requires long-term responsibility, good governance and transparency -- things that the country is still found wanting, notwithstanding the best efforts of the BSP and the reform thrusts of the current administration. The Linaburg-Maduell Transparency Index for SWFs counts among its criteria for transparency the following: history, origin, and government ownership structure of the fund; independent audited annual reports; percentage of company holdings and geographic location of holdings; market value, returns, ethical standards, investment policies, and objectives. For instance, the Abu Dhabi Investment Authority created an Accountability Authority to maintain full disclosure of accounts as a response to its being ranked among the two least transparent SWFs.
Still, one thing may be worth thinking about: the Philippines’ GIR will not grow indefinitely. At some point, the accumulation in reserves will wane or even reverse. As the influx of foreign exchange remains strong at present, it may be worth contemplating whether “sparing a few dollars” for a Philippine SWF -- a long-term investment -- could eventually net off much more gains than losses.
The Institute for Development and Econometric Analysis (IDEA), Inc. is a non-stock, non-partisan institution dedicated to high-quality economic research, instruction, and communication. The views and opinions expressed herein are those of the author and do not necessarily reflect those of the organization. For questions and inquiries, please contact Remrick Patagan via ideainc.mail[at]gmail.com or telefax no. 920-6872.
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