Bangko Sentral capital buildup seen stalling if it funds Maharlika

THE central bank said its plan to build up capital to P200 billion could be delayed if legislation obliges it to supply seed capital to the proposed Maharlika Investment Fund (MIF).

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Francisco G. Dakila, Jr. told the Senate banking committee, which is evaluating a bill setting up the sovereign wealth fund, that the bank could take 14 years to reach its target capitalization if it is designated the primary source of Maharlika capital.

The BSP’s capital buildup, if the proposed Maharlika Investment Fund Act becomes law, could take “about 14 years, as opposed to about half of that (if the bank does not fund Maharlika), but that’s just a rough estimate,” he told the Senate.

Senator Maria Lourdes Nancy S. Binay had been asking for detailed capital buildup scenarios for the BSP should the measure not pass.

If signed into law, the measure will require the BSP to contribute 100% of its dividends to the sovereign wealth fund in the fund’s first two years.

After that period, the central bank’s contribution drops to 50% of its dividends, with the remaining 50% to be deposited into a special account holding the capital buildup funds.

“The impact of the provisions would be a slight delay in the completion of the BSP’s capital buildup,” Mr. Dakila said.

The timeline was based on previous distributions of bank earnings, with dividends in 2020 amounting to P40.5 billion, in 2021 P16.35 billion and in 2022 P17.41 billion, according to the BSP.

“On average, you will lose about P20 billion a year, so that’s about P40 billion in two years,” Senator Sherwin T. Gatchalian said.

“On the one hand, you’re saying that you need to strengthen the regulator; on the other hand, you’re not doing that, you’re willing to forgo (the capital buildup),” he added. “If you come back here and ask to increase your capital, how can we trust you?”

Mr. Dakila said the BSP is required by law to remit at least 50% of its earnings to the National Government. “That dividend is government-owned.”

However, Mr. Gatchalian said the law also states that “any and all declared dividends of the Bangko Sentral in favor of the National Government shall be deposited in a special account in the general fund and earmarked for the payment of the Bangko Sentral’s increase in capitalization.”

“We do not see these provisions as impinging on the BSP’s ability to achieve its mandate,” Mr. Dakila said, noting that the BSP’s balance sheet was “strong” and “improved.”

“I don’t see any improvement,” Mr. Gatchalian said. “The capitalization is still P60 billion, the target is P200 billion, so where’s the improvement there?”

“We really need to review the mandates because in the charter, it’s very clear that we need to increase the capitalization,” he added.

Foundation for Economic Freedom (FEF) President Calixto V. Chikiamco, speaking at the hearing, said that the organization does not object to the creation of the fund, but “the BSP and GFIs (government financial institutions) should be removed as funding sources, the primary objective of (Maharlika) should be clarified…, and the level playing field should not be tilted in favor of the MIF.”

The FEF noted the need for “a strong BSP in an era of economic and geopolitical uncertainty.”

According to the FEF position paper, “this could put the independence and credibility of the country’s sole monetary authority at risk because it preempts the use of its declared income to the MIF rather than to build up its equity base as prescribed by its amended charter.”

“This would be problematic, since the BSP’s ability to perform its mandate of safeguarding price and financial stability is also determined by the adequacy of its financial resources,” it added. “With lower capitalization, the BSP’s conduct of monetary policy could be seriously impaired.”

Mr. Chikiamco also said that it was not clear under the bill if other funders like the Land Bank of the Philippines (LANDBANK) and the Development Bank of the Philippines (DBP) will have some sort of voting control within Maharlika.

He warned of moral hazard if the two big government banks are Maharlika funders, referring to the incentive to behave recklessly because the state-owned banks enjoy government backing and are strong candidates to be bailed out under most circumstances.

He also warned of systemic risk to the banking system if Maharlika books losses.

“The devaluation of the MIF will translate to losses to the DBP and LANDBANK, so it can light a fire with the rest of the banking system,” he added. “The capital of DBP and LANDBANK will erode and this may… result in financial contagion.”

The bill calls for P50 billion of the fund’s initial capital to be provided by LANDBANK, or 3.8% of its P1.3 trillion in investible funds, and P25 billion by the DBP or 3.1% of its P800 billion in investible funds.

The bill will also require the Philippine Amusement and Gaming Corp. and other gaming operators contribute at least 10% of their gross gaming revenue. Other proposed sources include royalties and special assessments on natural resources, proceeds from the privatization of government assets, as well as debt to be taken on by Maharlika. — Alyssa Nicole O. Tan