Tony Tan Warns Of Dark Clouds On Horizon For Markets

Source : The Straits Times, Aug 1, 2007

US sub-prime woes, oil prices pose risks, but GIC has taken 'necessary caution'

THERE are 'dark clouds on the horizon' for financial markets that ought to be acknowledged and heeded, said Dr Tony Tan, deputy chairman of the Government of Singapore Investment Corporation (GIC).

These risks include tightening credit due to the United States sub-prime mortgage crisis, he said, adding that GIC has 'taken necessary caution'.

Dr Tan, who is also GIC's executive director, was speaking yesterday after announcing the establishment of the GIC School, a formalised entity which will run its staff training and development programmes.

GIC manages Singapore's reserves, with funds of more than US$100 billion (S$150.5 billion).

Dr Tan, noting how the Dow Jones Industrial Average dropped 500 points last week, said: 'Major economies like the US and Europe are doing well, and we have the ingredients for growth and good financial markets.

'But there are dark clouds on the horizon we must pay good attention to.'

Dr Tan, who is also chairman of Singapore Press Holdings, cited three risks. One is the crisis in the sub-prime mortgage market in the US, which may lead to credit tightening, 'reversing the sea of liquidity in the past'.

The second is the rise in oil prices.

And then there is the danger that some asset markets seem to be priced to perfection, where prices already take into account a very rosy scenario for the world economy.

There are also 'exogenous' risks such as terrorist attacks, avian flu and Sars, he noted.

'We must be able to strike a balance - not to take a pessimistic view but to exercise caution, and be a conservative investor aware of the risks. This is an example of how nothing is ever static in a financial world.'

Asked whether GIC is concerned about its investments amid the sub-prime mortgage problems in the US, Dr Tan said: 'GIC has taken necessary caution, and the last few years have been exceptional for investors including GIC.'

He cited some economists calling the past few years a 'Goldilocks' situation - not too hot or too cold, but perfect.

'But we must be prepared for what defence analysts call 'unknown unknowns'', he cautioned.

'For example, if markets start to reprice risk and risk premiums rise and liquidity tightens, it will be difficult for all investors.'

Asked if GIC was worried about a possible backlash against government investments, Dr Tan said that with an increase in the number of sovereign wealth funds, there will be concerns.

'If it's just Singapore, Abu Dhabi which have sovereign wealth funds, people would not be so worried.

'But now other countries are starting such funds. These funds will be investing and taking stakes in the developed markets. The last thing we would want is protectionism developing,' he said.