Monday, 30 May 2011

Special Report: Time for a Phl wealth fund


In a little more than a decade, gross international reserves (GIR) has shot up from $15.06 billion at the end to 2000 to $678.8 [sic -- it should be 67.88] billion as of end-April as the remittances from the country’s unsung heroes, the overseas Filipino workers (OFWs), steadily increased.

This more-than-quadrupling in the level of the GIR has resulted in a very comfortable margin of safety for the gross reserve management thrust of the Bangko Sentral ng Pilipinas (BSP) since the end-April level accounts for 10.4 months of imports.

Usually, a country’s reserve level should be able to finance three months of imports. For prudent levels, a central monetary authority sets aside six months worth of imports in its reserve level.

The continued surge in the country’s reserves, no doubt fueled not just by the rise in the number of OFWs but the shift from less skilled to skilled personnel, has given rise to suggestions for the country to have its own sovereign wealth fund, to come from the excess GIR hoard.

One senior banker told the BusinessMirror that the time is up for the Philippines to have its own country fund with the seed money to come from the BSP. The banker said the country could initially have $20 billion as a start-up fund for the contemplated sovereign wealth fund.

A $20-billion sovereign wealth fund will mean that the country will revert back to its end-May 2010 reserve level of $47.689 billion, enough to finance 7.2 months of imports, which is way past the prudent level of six months of imports.

This $20-billion start-up wealth fund for the Philippines can be used to fund some of the so-called PPPs, or Public-Private Partnership Projects, that the government has identified to jump-start the economy. More than 15 PPPs are in the pipeline and ready for bidding from local and foreign investors from China to Australia, and Thailand to the United Kingdom.

The buzz for a sovereign wealth fund for the country started with the continued surge in remittances that now average $1.5 billion a month. The rise is due in part to the deployment of engineers, IT technicians, nurses and even oil drilling personnel, who now account for more than half of the OFWs that get jobs abroad.

It is this marked shift in the composition of the deployed OFWs that accounted for the heartwarming rise in remittances. With their higher earnings, the BSP’s reserve swelled by leaps and bounds.

BSP data showed that it took seven years for the reserve level to double from $15.06 billion in 2000 to $33.75 billion by the end of 2007. However, it just took half that time for the reserve level to double anew to $67.8 billion as at end-April this year.

The reserves topped $40 billion in July 2009 and it raced to $53.75 billion in September 2010. Two months later, the BSP reserves hit another milestone at $60.58 billion.

The need for the Philippines to have its own sovereign wealth fund is premised on the judicious utilization of its excess reserves to fund economic activities that would key in substantial economic growth as in the case of financing, say, a new roadway that opens up economic opportunities in the countryside.

In Asia there are sovereign wealth funds that are used to prod economic growth or otherwise maximize earnings out of the reserves.

Indonesia’s own fund, the Government Investment Unit, known locally as Pusat Investasi Pemerintah, is now financing ports and land acquisitions for its 1,800-kilometer Trans-Java toll project. This tollway will induce economic activity and nudge Indonesia’s gross domestic product. The fund was set in 2007.

In Malaysia the Khazana Nasional, established in 1993, was primarily focused on investments in Malaysia’s companies but has since then expanded overseas. Khazana’s investments include the Kerpan shrimp farm, Malaysian Airport Holdings, Bank Lippo, Apollo Hospital Group and Oriental University. It now has $25 billion in assets and has set aside 12 percent for overseas investments.

Vietnam’s State Capital Investment Corp, which was started in August 2006, now has a portfolio of $420 million. Its wealth fund is intended primarily to improve efficiency of the state capital utilization for which it can be a partner in privatization and in various types of business areas.

One thing going for a Philippine fund is that it gets access to various sovereign wealth funds too and that it can tap the bond market to finance some of its avowed objectives, such as PPP funding.

In the case of Vietnam, for instance, it was able to sign several memoranda of understanding with the Qatar Investment Authority and Temasek Holdings of Singapore for the purpose of identifying possible investment areas.

Thus, the Philippines can benefit tremendously from the setting up of its own country fund, sourced from the BSP reserves, as the said cash hoard can not just finance the PPPs but even serve as bridge-financing tool for capital-intensive projects that can later on be sold to the private sector at a profit.

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