Philippines: 110 million people, lots of gold and human resources, but no wealth fund

1. WHY DOES THE PHILIPPINES NEED A WEALTH FUND? It’s a tool for national strategy, for nation-building. It’s the most open secret of building and preserving wealth in the global capitalist order. Every nation worth its salt should aspire to build such a nest egg. The Philippines, endowed with mineral wealth, had been eating the dust of its neighbours; and it would be catastrophic to wait any longer.

2. WHAT IS A SOVEREIGN WEALTH FUND (SWF)? It is a government-owned money pool invested in various financial assets — local and foreign — in stocks, bonds and commodities. They rank among the top and most complex financial securities in the world, but they’re not the exclusive domain of rich countries.

3. IS THE PHILIPPINES A WEALTHY COUNTRY? In terms of mineral wealth, yes. Exhibit 1: the country produced 420 metric tonnes of nickel in 2019 alone, not to mention other minerals (gold, copper, silver). In terms of human resources, yes. Exhibit 2: 10 million+ Filipinos work overseas, and sent home $33.6 billion in 2019. A sample of a nickel ore mined in one of the Philippine islands. The mineral is Tesla’s metal of choice for electric vehicle batteries. Will this mineral become the next source of curse for the country, instead of a blessing?

4. WHAT DO SWFs DO? They make money. Earnings go back to the people, the owners. These wealth funds invest like private investors do. But they are much bigger in size and power. According to the International Monetary Fund (IMF), SWFs could serve the following functions: 1. Stabilisation – safety net in case the economy falls into recession (e.g. Chile); 2. Savings fund – guarantees the welfare of the future generations (e.g. Norway); 3. Reserve investment fund – meets unexpected costs that may arise in the future (e.g. Government of Singapore Investment Corporation, GIC); 4. Development fund – helps improve a community (e.g. Taiwan); 5. Contingent pension reserve fund – back-up in case unidentified pension liabilities on the government’s balance sheet arises (e.g. Ireland).

5. WHAT IS THE MAIN FUNCTION OF AN SWF? There are three types (or functions): One type is an entity that buy stocks and bonds for capital appreciation, but managed by the public sector (central bank), or an entity created by law. The other two are the foreign exchange reserve funds and public pension funds. Foreign exchange (FX) reserve funds are the primary component of the official settlements account in the balance of payment (BOP) of a country. BOP is the accounting record of the lending, borrowing, and trading of a country — in currency denominated and owned by the central bank which is kept in case the country sinks into a deficit.

6. HOW ARE SWFs GOVERNED? Like any other financial instrument, SWFs follow guidelines that ensure appropriate investment practices, good governance and accountability. The IMF has drafted the Generally Accepted Principles and Practices (GAPP) of the SWF, known as the Santiago Principles, in 2008. These 24 principles present the legal framework, objectives, and coordination with the macroeconomic policies, the institutional frameworks and governance structures. It also covers the investment and risk management frameworks that concern SWFs. Compliance to the Santiago Principles is voluntary.

7. IS THE CREATION OF A SWF ONLY FOR THE RICH COUNTRIES? No. Timor Leste (East Timor), and African nations like Mauritania, Algeria, and Nigeria have their own SWFs. Sure, they all have an oil-based SWF, listed among the top 50 SWFs of the world. This shows SWFs do not depend on how rich the economy of a country but rather, countries with rich natural resources are the ideal establishers of SWFs. Photo shows students eating their lunch in Ermera district, Timor Leste.

8. CAN A COUNTRY CREATE SEVERAL SWFs? Yes. A country may set up as many SWF as it deems are needed, just like what the UAE and Singapore have done. In 2011, there were 53 SWFs listed around the world, with assets pegged at $4.766 trillion. That number has been growing. Today, nine years later, there at least 89 SWFs, according to the SWF Institute. In the past, President Rodrigo Duterte (left) has promised to create a "fund", but he did not go into specifics. At right is former economics professor, Dr Benjamin Diokno, now the BSP (Philippine Central Bank) governor. They're two of the Philippines' most powerful men today that could plant the seeds of a wealth fund for future generations of Filipinos.

9. WHY IS SINGAPORE SO MUCH RICHER THAN THE PHILIPPINES? Singapore’s GNI (gross national income) per capita — the dollar value of a country's final income in a year, divided by its population — is about 9 times bigger than the Philippines. While the Philippines is resource rich, it’s become a cause of much plunder, resentment, rebellion and separatism. On the other hand, the island nation of Singapore doesn’t even have a natural source of drinking water. But Singapore’s leaders have built at least $750 billion assets out of its two leading wealth funds — $440 billion (GIC) and $308 billion (Temasek Holdings). In terms of land area, Singapore is only 1/5th the size of gold-rich Masbate island, in central Philippines.

10. HOW WILL YOU FUND A PHILIPPINE-OWNED SWF? In general, funding can come from two categories: commodities and non-commodities. Commodities include the sale of land, exports of minerals and precious metals. For instance, proceeds from the Norway’s selling of oil are funneled to their SWF – the Government Pension Fund of Norway, one of the world’s biggest ($1 trillion+ in assets). Kuwait Investment Authority, the first SWF in the world created in 1953, was funded by oil sales. The Philippines is a highly mineralized country. But control over mineral wealth, through in theory is owned by the “Filipino people”, is concentrated in the hands of a few, who live mostly in Manila.

11. DOES THE STATE OWN FOREIGN EXCHANGE RESERVES WITH BSP? Yes. Bangko Sentral ng Pilipinas (BSP), the country’s monetary authority, is owned by the state. The state indirectly owns the BSP’s foreign exchange reserves through its ownership of the central bank (reorganised under 1993-era law, RA Act 7653 or the New Central Bank Act). Photo shows a view of the Philippine central bank.

12. CONVINCE ME SOME MORE, WHY IS THERE A NEED TO BUILD A PHILIPPINE WEALTH FUND? Say, the Philippine SWF had invested just $1 billion in Tesla sometime in October 2018 ($57.22 post-split price). Today, 24 months later, it would have easily gone up more than 7-fold — to more than $7 billion (stock price at $432, as of October 21, 2020). What did the fund manager do? Nothing! Just bought the stock and waited. Imagine if you had invested $10 billion (BSP, the central bank of the Philippines, currently sits on a $100-billion gross international reserves). Spread your risks around tech disruptors and innovators. Of course, there are downside risks. But risks can be mitigated, with tools used by professional investors (try Ark Invest). And there could be so much opportunity loss in not taking risks.

13. WHAT WOULD IT TAKE TO CREATE A PHILIPPINE SOVEREIGN WEALTH FUND? A law, or an executive order. President Rodrigo Duterte can opt to sign an Executive Order creating one, like he did with the Freedom of Information Order (E.O. 02 of 2016), a month after he was elected president…With about 600 days left before the end of Duterte’s term, it’s a moonshot for this to happen now, like his vow to work on federalism, now dead in the water.

14. WILL FILIPINO LAWMAKERS PASS A WEALTH FUND LAW? If Filipino voters demand it from their leaders there's a chance they'll get it. But Philippine lawmaking is notoriously expensive, moves glacially and follows big-business interests. Convincing a majority of the 304-members House of Representatives and the 24-member Senate to pass anything that benefits future generations is a long-drawn battle.Photo shows a scene in the Philippine House of Representatives during the election of a new leader Monday (October 19, 2020) following a tense political standoff between two Duterte allies.

15. WHAT ARE THE CHANCES OF IT HAPPENING SOON? The Philippines has a relatively young population — a total of 110 million inhabitants, with a median age of 25.7 years, according to Worldometers. If voters demand greater equity and smarter money management from their leaders (with elections due in May 2022) there's a chance. If lawmakers feel the country’s mineral wealth belongs to everybody, and shouldn’t be exhausted by the current generation (meaning, the politically-influential mining firms), but must also preserved for future generations (by way of a commodities-based SWF), it can still happen.

16. CAN NON-MINERAL ASSETS BE USED TO FUND IT? Yes. Photo shows a nickel ore mine in the Philippines. The Philippines produced 20.8 tons of gold (valued at $1.337 billion) and nearly 30 tonnes of silver in 2018. In 2019, the Asian country produced 71,900 metric tonnes of copper (valued at $489 million), based on Statista data. By law, the government gets 5% royalties from the sale of such minerals. On the other hand, non-commodity SWFs may involve moving part of the assets from official foreign exchange reserves under the management of the BSP, the central bank. BSP also actively buys gold produced by local mining companies.

17. HOW WILL THE MONEY BE INVESTED? Aside from investing in minerals, currencies, and stocks and bonds, SWFs also venture into long-term and “illiquid” assets, like infrastructure projects (tolled skyways, airports, real estate, etc). A low-hanging fruit could be stocks, such as disruptors like Amazon, Apple and Google. Tesla, which is disrupting global transport, is a major user of nickel, for its EV batteries. The Philippines produced 420 metric tonnes of nickel in 2019, according to Statista. In 2017, the Philippines was the world’s top nickel ore producer. The Philippines does not have a nickel processing industry. And how much of the mining royalties actually went to the people?

18. HOW WILL THE EARNINGS BE USED? If you have lots of money, it’s a good problem to have. Just be more civilized and agree on how to use it best. One potential use: 4Ps — the conditional cash transfer program for the poorest Filipinos, which is changing lives at the very bottom of the population, big time. Students among native Filipinos, known as Aetas, form a queue to sanitise their hands before a session at the makeshift learning centre for them. According to ADB, 16.6% of the population lived below the national poverty line in 2018. The proportion of employed population below $1.90 purchasing power parity a day in 2019 is 2.7%.

19. WHAT ABOUT PUBLIC PENSION FUNDS? Public pension funds come from contributions of employers and employees from for the benefit of members received after retirement. Agencies in the Philippines such as the Government Service Insurance System (GSIS) and the Social Security System (SSS) administer the pension funds. They are also state-owned/controlled, but exist only the benefit of members, not the general population.

20. DOES THE PHILIPPINES HAVE ANY MONEY TO SPARE? Yes. Unknown to many Filipinos, their government has been running budget surpluses. In budget-speak, it’s called “underspending”. For at least 12 straight years until 2019, actual disbursements of the national government fell short of the money earmarked. It means savings. For a country like the Philippines with urgent needs of infrastructure and social services, underspending is unacceptable. But underspending happens all the time. Photo shows an elevated "skyway" project in Manila.

21. WHAT’S WITH GOVERNMENT UNDERSPENDING? In June 2020, despite the pandemic-related cash doles, the Philippine government has hit a positive Php8 billion budget surplus that month. Until March 2020, the Philippines government had so much money to spend, prompting Bloomberg to warn in a report that “underspending” — not being able to “burn” money fast enough on slated projects —posed a threat to growth. Underspending means rickety mass transport system.

22. WHY DOES UNDERSPENDING HAPPEN? It’s down to poor planning, say experts. But also borne by the fear of government officials of overspending, which could land them in trouble. The agency that tracks spending is the Commission of Audit. Photo shows the planned Unified Grand Central Station in Quezon City, a suburb of Manila.

23. HOW LONG HAS THE GOVERNMENT UNDERSPENDING RECORD BEEN GOING ON? Until June 2019, weak spending by the national government continued despite the budget’s approval. Though this was reversed during the pandemic, still shows the government runs budget surpluses. From January to July 2020, the government had posted a budget deficit reaching Php700. 6 billion. This is 494% higher than in the same period last year. Government revenues fell 11.2% to P234 billion. Revenue collection rose to P351.0 billion in June, a robust double-digit increase of 50.06% (P117.1 billion higher) from last year’s P233.9 billion. The route of MRT 7 line planned in Manila.

24. WHAT ABOUT TAX COLLECTIONS? Of the total Philippine government revenue, 93% or P325.4 billion came from taxes. Tax collections spiked by 54.56% while the remaining 7%, or P25.6 billion, were sourced from non-tax revenues. January-June 2020 revenue of Php1,453.3 billion ($30 billion) fell by 6.09% (or -P94.2 billion), but is 0.12% or P1.7 billion higher versus the adjusted Php1,451.6 billion. program. The bulk of Philippine government revenues came its tax agency, the Bureau of Internal Revenue (BIR).

25. WHAT DOES THE COUNTRY’S GROSS INTERNATIONAL RESERVES (GIR) SHOW? The Philippines has amassed a GIR of $100 billion as of September 2020. This is higher than the GIR of most developed countries. GIR is a country’s main indicator of foreign exchange liquidity; it shows the country’s capability to pay for import and servicing external obligations. BSP reported that the GIR could cover 12 months worth of imports of goods and payments of services and income. It was also equivalent to 10.7 times the country’s short-term external debt. By comparison, the Reserve Bank of India (RSB), its central bank hold $540 in GIR (5 times more than the Philippines’ BSP) but India is 13 times more populous than the Philippines.

26. WHY IS THE PHILIPPINES AWASH WITH CASH: For one, remittances. Each year, some 10 million Filipinos work send over $30 billion. In 2019, OFWs sent $33.6 billion home — equivalent to half of the country’s annual tax collections. OFWs account for about 10 per cent of the country’s population. In July 2020, despite the pandemic, remittances rose 7.6% for the 2nd straight month. The bulk of OFW remittances go into consumer spending, and little in the way of investing.

BONUS: I'M A CONCERNED FILIPINO CITIZEN, WHAT CAN AND SHOULD I DO NOW? Write, tweet, Insta, Tiktok, email your congressman and/or senator (all the Senators), especially Senator Manny Pacquiao. Make him understand that Filipinos can also become wealthy via some tried-and-tested routes (other than being a phenomenal boxer, which does not last long). Wealth funds are a more sustainable way to make money for an entire country. You may send this article to them, and to your friends in Malacanang, so it would reach the ear of President Duterte. And maybe a miracle can happen, even if in slow motion. Or you could also do nothing, stay apathetic and just wish for better things to come. And have more of the same.