Healthy institutions are the cornerstone of any functioning democracy. They provide the framework for governance, ensure accountability, and uphold the rule of law. When these institutions operate independently, transparently, and effectively, they promote stability, contribute to development goals, and foster trust in governance. However, when subjected to political interference, particularly in the form of manipulation of funding and budgets, their integrity is compromised. Institutions contribute to stability especially in times of uncertainty.
As a former senior officer at the Development Bank of the Philippines (DBP), this writer was concerned about the effect of the P25 billion withdrawn from the bank in favor of the Maharlika Investment Fund. In the first place, the concept of a sovereign wealth fund works well when governments have budgetary surpluses or have little or no international debt. That not being our case, the Maharlika Fund had to be financed by drawing from existing institutions like the Bangko Sentral ng Pilipinas (BSP), Land Bank of the Philippines, and DBP.
The DBP is a key government financial institution tasked with supporting national development goals, particularly by financing infrastructure, small businesses, and rural development projects. The P25-billion withdrawal has far-reaching consequences. The DBP’s ability to provide affordable credit to priority sectors has been compromised. Sources for financing economic growth and development, particularly in underserved areas, have been further reduced. The smaller fund base could make it harder for the DBP to leverage additional funding from international or domestic sources, leading to higher borrowing costs.
The signs of DBP’s problems are starting to show. DBP is now seeking extension of regulatory relief from the BSP. With its strained liquidity position, adjustment to its capital adequacy ratio and common equity Tier 1 ratio are being sought. Although DBP executives clarified that the bank still maintains sound ratios, the call for comfort in regulatory relief shows that a safety cushion is necessary.
Banks are conscious of the need to keep their perception status in the community intact. Reputation risk is damage that can occur when it fails to meet the expectations of its stakeholders. Investors and borrowers might perceive DBP as financially unstable, leading to reduced participation in its programs and initiatives.
The Philippine Deposit Insurance Corp. (PDIC) was recently asked to remit P110 billion to bankroll programs and projects under unprogrammed appropriations in the 2024 General Appropriations Act. Although the PDIC president has asserted that its remaining reserve funds remain sufficient, the said withdrawal also poses several risks.
The PDIC plays a critical role in maintaining public confidence in the banking system by insuring deposits and ensuring the safety of the financial system. The reduction definitely affects its capability. What if a financial crisis of global proportions accompanied by a credit crunch gets into the picture? Nobody could have predicted the pandemic of 2020, and nobody can tell for sure if the remaining reserve funds will be sufficient. The PDIC needs to be strong to deliver in the face of shocks in this increasingly volatile world.
If depositors fear that the PDIC lacks sufficient funds, they may withdraw savings from banks, potentially triggering a contagion that results in a liquidity and banking crisis. The PDIC should be perceived as an anchor of stability, free and independent of political (government) interference.
If such withdrawals become regular practice, and even if only perceived as such, international observers and rating agencies may downgrade the stability of the Philippine banking system, making it more challenging to attract foreign investments. Hopefully, this doesn’t happen, but the withdrawal shows PDIC funds are not immune to government interception.
The zero-budget allocation to PhilHealth represents another case of institutional weakening. In the first place, the national subsidy to PhilHealth is mandated by the Universal Health Care Law. With the non-implementation of the law (a legal issue), funding will now only rely on direct contributions and its reserve fund. As an insurance agency, PhilHealth is required to have reserve funds. Is it sufficient, especially with reports that PhilHealth allegedly has billions of obligations from claimants?
Expectedly, PhilHealth management claims their funds are sufficient. However, the absence of subsidies will definitely affect its future needs. The actuarial sufficiency of present reserves needs to be studied. Health, after all, is a fundamental right. A perception that the government is neglecting healthcare can lead to widespread dissatisfaction and social instability.
The withdrawal of funds from these key institutions sends a dangerous signal to the public and other institutions. Financial instability in one institution creates a domino effect, eroding trust in others. Institutions like the DBP and PDIC play crucial roles in economic stability. The PhilHealth case affects everyone. Their financial weakening would deter investments, reduce job creation, slow economic growth, and erode public trust.
Safeguarding these institutions should be a concern for the informed public. Civil society organizations and media play an essential role in exposing attempts to undermine institutions. Budgets for critical institutions should be allocated through a transparent, non-partisan process. Institutions should be strong to deliver their mandates decisively and outside of the push and pull of politics.
The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX.
Benel Dela Paz Lagua was previously EVP and chief development officer at the Development Bank of the Philippines. He is an active FINEX member and an advocate of risk-based lending for SMEs. Today, he is independent director in progressive banks and in some NGOs.
