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LANDBANK health at risk from sovereign wealth fund — economists

By Kyle Aristophere T. Atienza, Reporter

ECONOMISTS are worried about the alleged failure of Philippine lawmakers to take into account the health of state-owned Land Bank of the Philippines (LANDBANK) when it approved a proposed sovereign wealth fund.

Congress should have considered Fitch Ratings’ warning that LANDBANK’s common equity Tier 1 ratio of 13.9% — a measure of its financial strength — at the end of last year could drop if it is forced to contribute to the Maharlika Investment Fund, said Enrico P. Villanueva, a senior lecturer at the University of the Philippines Los Baños Economics Department.

“Fitch already indicated that these ratios could turn their outlook from stable to negative,” he said in a Facebook Messenger chat.

Mr. Villanueva said LANDBANK has good ratings only because of implicit government guarantee, adding that credit rating companies look at data, not the spin. “Banking is a public trust. When the state tinkers with government financial institutions, it risks losing public trust,” he tweeted separately.

Pamela Louise Y. Nuyles of LANDBANK’s Public Communications Department declined when asked to comment via Viber.

Fitch Ratings in April revised its outlook for LANDBANK’s capitalization and leverage score of “BB” to negative from stable given the potential impact of its participation in the Maharlika fund on its loss-absorption buffers.

The newly passed bill requires the state lender and Development Bank of the Philippines (DBP) to contribute P50 billion and P25 billion, respectively, to the fund. The National Government must also contribute P50 billion.

Funds from the Philippine Amusement and Gaming Corp. and proceeds from privatization and transfer of government funds may also be used.

“LANDBANK’s ratings are a direct function of solvency and liquidity,” John Paolo R. Rivera, an economist at the Asian Institute of Management, said in a Viber message. “Its high ratings have been driven by its healthy solvency and liquidity metrics. It also benefits from the expectation, and fact, that it is government-supported, given that it is fully owned by the government and fulfills government policy objectives.”

If the Maharlika Investment Fund affects its solvency and liquidity, then it would certainly affect its ratings, he added.

“It is unlikely that the framers of the Maharlika Investment Fund bill took this into account,” Leonardo A. Lanzona, who teaches economics at the Ateneo de Manila University, said in a Messenger chat. “Even if they did, they probably ignored the warning.”

Finance Secretary Benjamin E. Diokno in March said President Ferdinand R. Marcos, Jr. had agreed to merge DBP and LANDBANK, with the latter becoming the surviving entity.

He said the merger, which is expected to take effect before the year ends, would save the government about P5.3 billion a year or at least P20 billion in the next four years.

Under the measure, the Bangko Sentral ng Pilipinas (BSP) must contribute 100% of its dividends to the Maharlika Investment Fund in the first two years. Its contribution drops to 50% after that; the remaining half will be deposited in a special account for its capital buildup funds.

Mr. Lanzona said Fitch’s warning should also apply to the central bank, which told lawmakers earlier that using its dividends as seed capital for the sovereign wealth fund would delay its capital buildup.

“Despite all this, the Maharlika Investment Fund bill was passed anyway,” he said. “This shows how much our democratic institutions have degraded during the Marcos administration.”

The government is the sole stockholder of the central bank, whose capitalization was increased to P200 billion from P50 million under a 2018 law.

Last week, former central bank Governor Diwa C. Guinigundo said it would now take about 17 years — instead of eight years — to recapitalize the central bank.

He noted that to replenish public money that will be used for the Maharlika fund, the government must either increase taxes or borrow money.

On the other hand, central bank Governor Felipe M. Medalla last week said he had no issues with the bill, adding that Maharlika is more of a development rather than a sovereign wealth fund.

But public budget analyst Zyza Nadine M. Suzara flagged a provision in the bill mandating the Bureau of the Treasury to release remittances of certain government financial institutions and government-owned and -controlled corporations to the fund.

“That means there will be less for the general fund that finances the budget,” she said in a Facebook Messenger chat.

Mr. Villanueva, meanwhile, said Finance Secretary Benjamin E. Diokno has contradicted “both the bill and people’s will” after saying that the Government Service Insurance System (GSIS) and Social Security System (SSS) could still invest in the Maharlika fund on a project level.

Public opposition to the bill was largely caused by lawmakers’ initial proposal to require GSIS and SSS to contribute to the fund.

The newly passed bill now bars SSS, GSIS and other agencies that provide pension funds such as the Philippine Health Insurance Corp., Overseas Workers Welfare Administration, Philippine Veterans Affairs Office and Home Development Mutual Fund (Pag-IBIG Fund) from investing in the sovereign fund.

Mr. Diokno last week said President Ferdinand R. Marcos, Jr. would likely sign the bill before his second State of the Nation Address in July.

The Finance chief said the fund is expected to be fully operational by yearend.

Ms. Suzara earlier urged the public to “closely monitor” how funds for the Maharlika fund would be incorporated in next year’s national budget.

“When legislation for the 2024 national budget begins, we need to watch out how much the appropriations for the Maharlika Investment Fund will be and how the limited fiscal space will be reallocated,” she told BusinessWorld.

“What programs and projects will be deprioritized and therefore lose appropriations in order to give way for Maharlika?”

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