What is a sovereign wealth fund?

By Joshua Corcuera

In the past few days, a proposal of establishing a sovereign wealth fund in the Philippines was floated by several members of the House of Representatives. The fund, named the Maharlika Wealth Fund, is planned to be worth P 275 billion. But it begs the question, what is a sovereign wealth fund in the first place?

A sovereign wealth fund (SWF) is an investment fund owned by the state and such fund is invested in assets, both real and financial, such as stocks, bonds, real estate, hedge funds, and so forth. Around the world, there are multiple SWFs in existence, from Norway to Singapore, from Hong Kong to Indonesia.

In terms of assets, the Norwegian Government Pension Fund is one of the largest SWFs globally with assets of over US$ 1.22 trillion. This SWF is divided into two: the larger GPF Global, also known as the Oil Fund, and the smaller GPF Norway. The Oil Fund was established in 1990 by the Norwegian government to invest the excess or surplus revenues of the petroleum sector in the European country. For context, Norway, home to only 5.4 million people, is one of the largest exporters of oil globally which enables it to have excess earnings to establish a SWF. Meanwhile, in neighboring Singapore, there are two existing SWFs: (1) GIC Private Limited and (2) Temasek Holdings with assets of US$ 578 billion and US$ 484.4 billion, respectively.

As you may have observed, these two countries have excess funds which can be used to invest into SWFs. Commonly, such state-owned funds are established from fiscal surpluses, proceeds of privatizations, governmental transfer payments, balance of payments surpluses, and receipts resulting from resource exports, among others.

Here in the Philippines, however, the proposed SWF would be funded by government financial institutions including the Government Service Insurance System (GSIS), Social Security System (SSS), Land Bank of the Philippines, and the Development Bank of the Philippines, among others. In other words, the proposed Maharlika Wealth Fund will not be financed from excess wealth, foreign reserves, or natural resource extraction profits.

Moreover, what are the objectives or ultimate goals of these SWFs? Normally, these funds are established for the purpose of funding social and economic development, increasing savings for future generations, and sustaining long term capital growth. While these pursuits may sound noble, good intention alone is not sufficient for our country to grow and develop socially and economically. After all, there have been issues of corruption with the SWFs of some countries, such as in Malaysia where the 1MDB scandal resulted in the conviction of former Prime Minister Najib Razak.

As of now, the proposal is still at the House of Representatives, if I am not mistaken. There has been considerable criticisms and concerns already from the public in social media and among several groups. To be fair, the establishment of a SWF is not automatically bad. However, the timing and the source of the fund must both be weighed, especially that the country’s debt has grown substantially in the past few years.

With this in mind, it is imperative for the masses to be alert and vigilant of the actions of those in power, because their actions can affect us—maybe not now, but in the future.