pacific money | Economy | Southeast Asia
Such funds are generally established in smaller commodity-exporting countries that have large current account surpluses. The Philippines is none of these.
Last week a plan was put forward for the creation of a sovereign wealth fund In Philippines. The first draft of the plan imagined an investment fund with an initial capital of about 5,000 million dollars. The fund would be controlled by President Ferdinand Marcos Jr., and his family and allies backed him in the legislature. Initial funding would come from public entities such as the Philippine Land Bank and state pension funds. After rejection due to the lack of supervision and the risk of using the pension funds for this purpose, the plan was reduced and the provision of pension funds was eliminated. Its final form, if it comes to fruition at all, is still being debated.
But surprisingly, it was even proposed in the first place. Some observers have warned that it could become another 1MDB, Malaysia’s sovereign wealth fund plagued by corruption and mismanagement. Even setting aside the rent-seeking opportunities that such state investment vehicles create, the Malaysian fund is not really the right example for comparison. A more instructive example is Indonesia.
Typically, sovereign wealth funds are located in countries that have current account or trade surpluses. The classic example would be that of resource-rich countries, such as Norway or Qatar, which take a part of the surplus generated by their exports of raw materials and reinvest it through state-controlled funds. Countries that are not resource-rich but are nevertheless in surplus, such as Singapore, often also have sovereign wealth funds. From a balance of payments perspective, the key is that more money goes into the country than it goes out. The state captures part of this excess and reinvests it.
Malaysia, despite its mismanagement of 1MDB, is a smallish commodity exporting country that typically operates large surpluses in your checking account. State-owned oil and gas giant Petronas pays billions of dollars in dividends to the public coffers every year, so it’s no surprise that Malaysia funnels some of that surplus into creating a sovereign wealth fund. The fund became a lightning rod for corruption, but from a macroeconomic perspective we would at least expect a country like Malaysia to have a sovereign wealth fund.
Indonesia and the Philippines, on the other hand, are not usually surplus countries and have been large net debtors in recent years. The Philippines is not even a large exporter of raw materials and imports much of its energy. It is very rare to find sovereign wealth funds in those countries, because they do not have the necessary surpluses to finance them.
Indonesia has tried to get around this by seeding its investment fund with a mix of state capital and shares of some of its most profitable state-owned companies (but not any pension funds in particular). The goal is for this seed capital to increase with private investment, but it is not clear if it will work or not. The Philippines may also be hoping to catalyze private investment in its state-controlled fund, but in both cases, it is unusual for deficit countries to structure and finance sovereign wealth funds in this way.
The Philippine proposal is in line with other important economic policy decisions that Marcos Jr. has made early in his administration. In the budget 2023For example, the Philippines plans to increase spending even as other countries in the region, including Indonesia, are cutting back as global monetary conditions tighten. Clearly, the Marcos administration believes that increasing spending, riding deficits, and aggressively redeploying state assets into higher-yielding investments will help the Philippines meet the challenge in what is projected to be a tough global economy in 2023 and beyond.
Whatever the outcome, these economic policies are highly unorthodox and carry significant risk. Since the Philippines is not a large exporter of commodities and does not normally run a surplus, it is a highly unlikely candidate for a sovereign wealth fund. This is probably why it is difficult for plan sponsors to answer basic questions about how it will be funded. It’s because countries like the Philippines don’t typically have sovereign wealth funds and we don’t expect them to.