Latest Developments:
Hong Kong: The territory is seeking to position the US$7.9 billion Hong Kong Investment Corporation (HKIC) as its version of Temasek with strategic investment in the local economy to regain competitiveness against rival Singapore. Investment will start by the year-end and it is actively recruiting with its new CEO set to be appointed soon.
Israel: Israel Citizens Fund (ICF) exceeds US$1 billion AUM, gas exports to Egypt set to drive growth. Key risk: lower gas prices.
Pakistan: Legislation for the Pakistan Sovereign Wealth Fund (PSWF) was passed and US$8 billion of assets transferred in August, but strategic direction unlikely until the conclusion of the November general election. Key risk: political instability and politicization of PSWF’s role.
Philippines: Presidential assent for the US$8.9 billion Maharlika Investment Fund (MIF) is being challenged in the courts by opposition legislators over governance concerns, but the Supreme Court is likely to endorse the government’s position. Key risk: delays in appointments and disbursal of funds to the MIF.
Hong Kong: Temasek-style fund set to start investing
Launched in October 2022, Hong Kong’s new sovereign wealth fund, the Hong Kong Investment Corporation (HKIC), is examining potential funding projects and is expected to begin investments by the year-end. Set up as the territory’s version of Singapore’s Temasek, the HK$62 billion (US$7.9 billion) HKIC consolidates various investment vehicles established by the special administration region’s central bank, the Hong Kong Monetary Authority (HKMA), including:
The HK$22 billion (US$2.2 billion) Hong Kong Growth Portfolio
The HK$5 billion (US$0.6 billion) Strategic Tech Fund
The HK$5 billion (US$0.6 billion) Greater Bay Area Investment Fund
The HK$30 billion (US$3.3 billion) Co-Investment Fund.
The deadline for applications for a new CEO ended in June and recruitment is ongoing. It will invest directly as well as through partnerships. The government venture capital fund Shenzhen Angel Investment Guiding Fund is providing guidance on investment in early-stage projects and in general partners of other funds.
The development of the HKIC comes after a three-year process, starting with the FY2020/21 budget which set out the establishment of the Hong Kong Growth Portfolio, under HKMA’s Future Fund, which sat under its Exchange Fund. The growth portfolio was seeded with the equivalent of 10% of the Future Fund’s assets and totalling HK$22 billion (US$2.8 billion) to support its strategic and political objectives. It is focused on diversification and supporting Hong Kong’s status as a financial, commercial and innovation centre. The FY2022/23 budget allocated an extra HK$10 billion (US$1.3 billion) to the portfolio, half of which was allocated to the Greater Bay Area (GBA) Investment Fund and the other half to a new Strategic Tech Fund to focus on investment opportunities in the GBA and invest in technology enterprises and projects.
The pools of money were intended to claw back some of the competitiveness lost amid a turbulent point in Hong Kong’s history. Strategic investments aim to bring benefits to the territory’s economy, marking a departure from the established practice that the HKMA’s Exchange Fund does not invest in Hong Kong due to potential conflicts of interest and linking savings too closely with the domestic economy.
Hong Kong sees the need to raise its game to match Singapore’s growing strength in life sciences, foodtech and advanced manufacturing, although the HKMA lacked Temasek’s experience in venture capital and private equity. The creation of the HKIC aims to overcome the HKMA’s lack of expertise in private equity, as well as marking a departure from Hong Kong’s traditional free market approach and adopting a more Singaporean way of nurturing the territory’s strategic growth.
Israel: Conservatively Allocated, Reaches US$1 billion
The Israel Citizens Fund (ICF) topped US$1 billion in assets under management in Q2, up from US$618 million at end-2022 and US$274 million at the time of launch in June 2022. Utilizing revenue from its expanding offshore natural gas industry, the ICF aims to reach US$12 billion in the next decade. The sovereign wealth fund is allocated 60% to foreign public equity and 40% to fixed income, mostly corporate bonds.
Gas exports to Egypt from the Tamar and Leviathan gas fields are set to drive expansion of the ICF’s portfolio. The conflict in Ukraine has boosted gas income potential in Egypt as Europe seeks to diversify energy sources to replace Russian supply and replace coal with gas.
Under a deal signed last month, over the next 11 years Israel will increase its natural gas exports to Egypt by an additional 38.7 billion cubic meters as the government seeks to boost Tamar’s gas production by 60%, with about two-thirds of the increased output destined for Egypt and the rest for domestic use. The increase will no doubt support funds flowing into the ICF. The main risk to the fund’s growth is the price of gas, which could be tempered by a glut in supply as LNG exports ramp up elsewhere as well as Europe’s investment in renewables as it seeks to achieve net zero targets. The fund’s establishment was well behind schedule due to slower-than-expected revenues.
Pakistan: Hoping for Emirati Support
Financially troubled Pakistan has turned to establishing a sovereign fund to reform its state-owned enterprises, having averted a default in July through the signing of a US$3 billion Stand-By Arrangement with the IMF. An IMF Article IV staff report issued last year advocated “restructuring SOEs to improve efficiency,” noting that “Pakistan’s SOE sector is saddled by poor performance and weak corporate governance, posing significant fiscal risks”. It added that “despite their important role in the economy, the financial performance of many SOEs is weak, with one-third consistently generating losses.”
In August, the Pakistani government announced it had transferred its entire shareholding in seven companies ranging from banks to infrastructure to energy companies to a new US$8 billion new strategic sovereign wealth fund - the Pakistan Sovereign Wealth Fund (PSWF) - that hopes to attract foreign investment and spur growth. Assets include the Oil and Gas Development Company, Pakistan Petroleum, National Bank of Pakistan, Pakistan Development Fund, Government Holdings Private Ltd, Mari Petroleum Company, and Neelum Jhelum Hydro Power Company.
Under legislation enacted by Prime Minister Shehbaz Sharif’s administration before it handed power to an interim pre-election government, the fund can divest stakes in the companies or conduct investment and is exempt from privatization laws to raise capital or debt. The outgoing government believed that consolidating the assets into a single fund will enable it to generate liquidity and attract inward investment. Cash raised from divestment of its core assets could be used to fund investments in agriculture, mining, and information technology sectors, according to the officials.
The government believes that consolidating the assets into a single fund will enable it to generate liquidity and attract inward investment. The fund’s purpose will be to improve management of the assets, including investing in joint ventures with foreign investors, such as other sovereign wealth funds. Cash raised from divestment of its core assets could be used to fund investments in agriculture, mining, and information technology sectors, according to the officials.
Whoever wins the scheduled November national elections, Islamabad will be seeking to entice investment from the UAE, which last year said it would plunge US$1 billion in Pakistani companies. The Abu Dhabi Investment Authority (ADIA) reportedly provided technical assistance in drafting the bill that created the fund.
Advocates of the PSWF are hopeful that foreign capital will be accompanied by improved managerial competence. Also, by bypassing the usual red-tape that encumbers privatization, transactions are likely to be sped up and entice foreign investment. Yet, if the process of divestment is not transparent, price discovery will be questioned, and sales could raise doubts – and therefore political disputes – over valuations.
Philippines: Bogged Down by Legal Challenges
The Philippines’ efforts to create a sovereign wealth fund have been more turbulent than the new Israeli and Pakistani funds, as it is mired in political controversy over the speed in which it was established and the issue of the President’s overarching control.
This month, opposition politicians asked the Supreme Court to rule on how the Maharlika Investment Fund was legislated. The plaintiffs claim it was passed too quickly and did not allow for the required viability review for new government corporations to ensure that government does not “haphazardly relinquish its governmental functions without basis.” The Constitution requires a viability test before a state-owned corporation can be established.
President Ferdinand R. Marcos, Jr justified the move to hasten the passing of the bill due to “the downgrade of the global growth projection this year on account of debilitating inflation, fluctuating and unstable prices of crude oil and other fuels due to the protracted conflict between Ukraine and Russia, and continuing interest rate hikes in the international financial sector.”
While it is likely the Supreme Court will uphold the Maharlika Investment Fund Act 2023, which was signed into law on July 18, the politicization of the initiative has called a pall over President Ferdinand R. Marcos, Jr’s ambition to use it to achieve his economic targets. The fund is set up to support the President’s Agenda for Prosperity and the eight-point socioeconomic roadmap, indicating that it would play a strategic role in the national economy similar to that of Singapore’s Temasek and Indonesia’s INA.
The Maharlika Investment Corporation (MIC), which manages Maharlika, has authorized capital of PHP500 billion (US$8.9 billon), with PHP125 billion (US$2.2 billion) sourced from: the Land Bank of the Philippines (PHP50 billion), Development Bank of the Philippines (PHP25 billion), and the national government (PHP50 billion). For subsequent funding, it will tap the central bank’s declared dividends, Philippine Amusement and Gaming Corporation’s gaming revenue streams, and other sources, such as royalties and/or special assessments based on natural resources, proceeds from privatization of government assets, and borrowing.
Critics claim that using capital from state banks could undermine their ability to meet their capitalization requirements and makes them more vulnerable to failure. Moreover, siphoning off capital from the Land Bank deviates from its mandate to assist farmers and the rural population, denying them funding. Other criticisms center on governance with concerns that the fund could be vulnerable to corruption with funds misused to consolidate power and wealth around the President and his allies.
This week it was revealed that the contribution of the Land Bank of the Philippines and the Development Bank of the Philippines to the Maharlika Investment Fund was still with the Bureau of Treasury (BoT), as the MIC has yet to convene and nominate a bank account. Meanwhile, the BoT is seeking applications for the top positions at MIC, including president and CEO, as well as for regular directors and independent directors. Applications close on 27 September. However, not all positions on the MIC’s board are open for application. According to legislation, of the nine-person body, the people who will fill the three permanent positions on it will be the Secretary of Finance and the CEOs of the Land Bank and the Development Bank. The board will be completed when a president and CEO, as well as two regular and three independent directors are selected.
