The Maharlika strategic investment fund — the ‘pause,’ the fix


Alea iacta est. The die is cast.

Republic Act (RA) 11954 was signed into law on July 18, 2023, establishing the Maharlika Investment Fund (MIF) and creating the Maharlika Investment Corp. (MIC) to manage the fund, following its passage in the House (HB 6608) on Dec. 14, 2022 and in the Senate (SB 2020) on May 31, 2023. The house adopted in full the Senate version of the bill, without going through the usual bicameral conference committee.

The Implementing Rules and Regulations (IRR) was signed by the Treasurer of the Philippines on Aug. 22, 2023, as provided for by Section 54 of the law calling for the promulgation of the IRR within 90 days from enactment, in consultation with the founding government financial institutions (GFIs) Land Bank of the Philippines (LANDBANK) and Development Bank of the Philippines (DBP).

However, “upon the directive of the president” the implementation of the IRR was suspended by a memorandum dated Oct. 12, 2023 from Executive Secretary Lucas Bersamin, “pending further study of the IRR.”

President Ferdinand R. Marcos, Jr. said, “the organization of the Maharlika proceeds apace” and that “we are committed to having it operational before the end of the year.” He insisted that the suspension of the IRR must not be seen as a “judgement of the rightness or wrongness of the Maharlika Fund” but that “we are just finding ways to make it as close to perfect and ideal as possible.”

“HOUSTON, WE HAVE A PROBLEM”LANDBANK and DBP had to request for “regulatory relief” from the Bangko Sentral ng Pilipinas/Monetary Board (BSP/MB) when they remitted their capital contributions.

TIMING. RA 11954 provided for the capital contributions of LANDBANK’s P50 billion and DBP’s P25 billion to be fully paid (Section 6.1) without specifying a timetable. The IRR, however, required the combined P75-billion contributions to be deposited to the account of the Treasurer of the Philippines for the benefit of the MIC “within five (5) days from the effectivity of the IRR” (Rule III, Section 6).

IMPACT ON CAPITAL RATIOS. At the forum on the Maharlika Fund held by the UPSE Alumni Association on June 21, 2023, this writer was one of the few who pointed out that the contributions from the LANDBANK and DBP to the initial capital of MIC are not in the same category of funds that the GFIs can allocate out of their investible or loanable funds. Instead, they are equity investments that will be deducted from their equity, following Basel 3 rules.

Based on calculations using the audited figures from 2022 annual reports of LANDBANK (pages 49-53) and DBP (page 155) — which show detailed computations of qualifying capital and the risk-weighted assets or RWA:

1. DBP ex-MIF capital ratios will fall below the regulatory minimum of 10% (CET 1 from 11.68% to 7.44% and total CAR from 12.61% to 8.36%). Unless it gets a fresh capital infusion, DBP would even have to shrink its loan book or collect on outstanding loans to meet the regulatory capital ratios.

2. LANDBANK’s ex-MIF capital ratios will drop (CET 1 from 13.9% to 10.2% and total CAR from 14.46% to 10.73%), barely meeting the regulatory minimum and cannot support any expansion in its loan portfolio.

3. Merging the LANDBANK and DBP will not help, as their composite CET 1 ratio will drop from 13.34% to 9.35% (below the 10% minimum) and total CAR from 13.90% to 10.01%.

4. In addition to falling below the minimum capital ratios, the immediate contribution of the LANDBANK’s P50 billion and DBP’s P25 billion may have led to violation (particularly in the case of DBP) of:

1. The very same law RA 1954 — Article III Section 12, and IRR Rule IV Section 12. “The investments from LANDBANK, DBP … shall not exceed 25% of their net worth.”

2. RA 8791 or General Banking Act of 2000, Article 1, Section 24.2. “The equity investment in any one enterprise … shall not exceed 25% of the net worth of the bank.”

ADVERSE IMPACT ON THE ECONOMY, CREDIT RATINGSBased on a leverage ratio of 6.5 to 8x, the P75 billion taken out from the capital base of LANDBANK and DBP and transferred to the MIC corresponds to siphoning off P500-600 billion of lending from the economy or 4-5% of the total loans of the banking industry. By some estimates, this represents an output loss equivalent to over 2% of GDP.

Fitch Ratings has warned that “… LANDBANK and DBP’s underlying loss absorption buffers are poised to weaken on the back of their contribution to the MIF, irrespective of regulatory forbearance that maybe provided to the banks.”

While not explicitly warning of a credit downgrade of their current BBB rating (which carries an implicit sovereign guarantee) Fitch said their capital contribution to the MIF “may pressure their standalone credit strengths, in the absence of other mitigating factors.”

Fitch also noted that the government stands ready to help the banks should they need it. LANDBANK’s 2021 annual report notes that it received a P27.5-billion capital infusion from the National Government to support its loan expansion and to help absorb the costs of the UCPB merger.

WHERE TO GO FROM HERE?The immediate solution is to revise the IRR to make the contributions of LANDBANK and DBP staggered over a number of years “until fully paid.” Alternatively, capital calls can be made only once the projects are identified and their viability established. The experience of strategic investment funds elsewhere, especially for infrastructure projects, shows that it takes time for projects to take shape and be funded. It is called “patient capital” for a reason. A disciplined approach to “viability first, funding to follow” will obviate the pressure to deploy the funds to less-than-ideal or wasteful projects.

In the case of DBP, a P5 billion per year contribution (roughly 7% of its unimpaired capital as of end 2022) can be a realistic number over five years that will allow it to meet the requirements of RA 1954, while allowing it to comply with regulatory capital ratios. Instead of having to cut back on lending to industries and MSMEs, it will have the breathing room to expand its loan book, generate income, and build up its internally generated capital to further sustain its lending growth. Similarly, the LANDBANK contribution can be downscaled to P10 billion a year over five years.

Should additional funding for MIC be needed from both GFIs, they can do so without impacting their capital ratios by subscribing to debt instruments that are convertible to equity at a later time. However, this option requires amending the law itself since it provides only for preferred shares that are non-voting, non-participating, and non-convertible (Article II, Section 6.2).

Such a revision in a key provision of the IRR will spare the two GFIs from having to avail of “regulatory relief” from the BSP/MB and avoid a possible credit rating downgrade.

The General Banking Act provides that any equity investment is subject to the “prior approval of the Monetary Board” (RA 8791, Section 24.2, last paragraph). The proposed revision in the IRR will spare the Monetary Board from the unpleasant task of exercising its lawful duty to withhold its approval of the equity investment of DBP for exceeding 25% of its net worth. An alternative scenario to outright disapproval would be for the MB to give its approval for the equity investment but reduced to an amount below 25% of its net worth.

Alexander C. Escucha is president of the Institute for Development and Econometric Analysis, Inc., and chairman of the UP Visayas Foundation, Inc. He is a fellow of the Foundation for Economic Freedom and a past president of the Philippine Economic Society. He is an advocate of best practice in corporate governance with over 40 years’ experience in banking and finance, particularly in strategy, communications, technology and stakeholder/ investor relations.

Neil Banzuelo

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