Should the Philippines establish a sovereign wealth fund?

Written by Kapronasia || March 29 2023

In December, the Philippines' House of Representatives approved a bill establishing a sovereign wealth fund. Known as the Maharlika Investment Fund (MIF), it is an initiative of President Ferdinand Marcos, Jr. aimed at raising capital for infrastructure projects, among other things. The Philippines will likely seed MIF with its central bank’s dividends and investible funds from the country’s Land Bank and Development Bank.

Critics of MIF contend that it may foment corruption and waste. They can point to the 1MDB debacle in neighboring Malaysia as evidence of what can happen when a sovereign wealth fund is mismanaged. An estimated US$4.5 billion was pilfered from 1MDB and former Malaysian Prime Minister Najib Razak is currently serving a 12-year prison sentence for his role in the scandal.

The Philippines ranks close to the bottom third in the anti-corruption watchdog Transparency International’s newest Corruption Perceptions Index, at No. 116 of 180, up from No. 117 the year before. In a scale that measures levels of public sector corruption, the Philippines’ score of 33 out of 100 was unchanged from 2021. A score of 100 means a country is “very clean” while zero means it is “highly corrupt.”

That said, the sovereign wealth fund has the backing of top economic officials in the Philippines, including Finance Secretary Benjamin Diokno. They say that its direct benefits include increased investments in and funding of big-ticket infrastructure projects, high return on green and blue projects, and countryside development including agriculture.

President Marcos has been busy pitching the sovereign wealth fund initiative to global investors, including at Davos in Switzerland and during a five-day official visit to Japan in February. At the end of the visit, Marcos said that three Japanese groups had pledged to invest in the fund.

With only two opposition senators in the Philippines’ 24-member chamber, the MIF bill is likely to be approved, though it could be adjusted considerably. Marcos would then need to step up efforts to woo investors and implement projects.

Marcos is likely encouraged by the success of several of the Philippines' neighbors. Indonesia’s sovereign wealth fund has raised US$20 billion. Singapore has not one, but two success stories: GIC and Temasek. Established in 1981 to manage Singapore’s foreign reserves, GIC currently has US$690 billion to US$799 billion in assets under management. Investment gains from GIC, the central bank and Temasek have been the biggest contributors to the national budget since 2018.

For its part, Temasek has US$287 billion in AuM and several of its Singaporean investments have gone to become regional leaders in their respective industries: DBS Bank, Singapore Telecommunications and Singapore Airlines.

Temasek has reportedly expressed interest in investing in MIF, according to Philippine media. In mid-March, Philippine Department of Budget and Management Secretary Amenah Pangandaman met with Temasek officials, who offered advice on how to effectively operate and manage a sovereign wealth fund.

With so much scrutiny of MIF while it is still at a nascent stage, and the personal political capital President Marcos has invested in the initiative, we do not expect it will go the way of 1MDB. A controversial proposal to use state-run pension funds as funding for MIF has already been shelved after widespread pushback from business groups and others.

If MIF is successful, there will be many benefits for the Philippines. Overall, a well-structured sovereign wealth fund attracts foreign investment, increases the return on investment in national savings, and promotes growth and social development.

However, success on the scale of what Singapore has achieved will not be easy. While President Marcos may serve as the face of the project, the Philippines will have to ensure that the right talent is in charge of MIC’s operations and management so that the fund is independent and efficient.