Act Fast Or Face Deep Recession: Tony Tan

Source : The Business Times, April 22, 2008

World could see worst recession in 30 years unless policymakers intervene urgently

The global economy will run into even more turbulence if policy makers don't act quickly and decisively to ease the credit crunch spilling over from the United States, says the Government of Singapore Investment Corp (GIC).

But the sovereign wealth fund is standing by its substantial investments in UBS and Citigroup after the sub-prime crisis ravaged the two mega banks.

Dr Tan: 'I am confident GIC will emerge stronger and more resilient, and take its place as one of the most competent and respected investment bodies in the world.'

Speaking to some 1,000 employees at the inaugural GIC Staff Conference yesterday, GIC deputy chairman and executive director Tony Tan warned that the world may face a recession 'longer, deeper and wider than any we have encountered in the past 30 years'.

'We are entering a period of extreme uncertainty in the world economy and global financial markets. As banks continue to de-leverage, cutting their lending activities and causing a contraction in credit supply, the prospects for the US economy - and possibly the world economy - are fraught with downside risks.'

But Dr Tan believes the economic downturn can be mitigated if the authorities in the US and elsewhere take decisive and timely action. 'If policymakers respond strongly and appropriately, investment markets and sentiments can turn around sharply.

'However, if such actions by the authorities are not taken within the next 3-4 months, it will be left to the market forces of supply and demand to stabilise the US housing market before we can see the light at the end of the tunnel. This will be a considerably more painful and long-drawn process.'

Despite the uncertainty, GIC is standing by its decision to invest billions of dollars in troubled banks UBS and Citigroup.

'We regard our investments in UBS and Citicorp as long-term investments that will give us good returns when markets stabilise and economic conditions return to more normal levels,' Dr Tan said.

GIC pumped 11 billion Swiss francs (S$14.7 billion) into UBS last December via a convertible bond issue that would eventually give it a stake in the bank. It has also not ruled out injecting more cash into UBS, which is looking to raise 15 billion Swiss francs through a rights issue, after reporting a second straight quarterly loss this month. GIC has said that it would examine the terms of the rights issue before deciding.

GIC also invested US$6.88 billion in Citigroup in January this year through a private offering of convertible preferred securities.

Dr Tan yesterday reiterated that GIC was able to make such investments because it was well prepared for the current credit crisis.

'We had moved to a more conservative posture in our portfolio by liquidating a portion of our equity holdings in the third quarter of 2007 and moving into cash - a measure we had not taken for quite some time. This provided us the liquidity to make substantial investments in UBS and Citicorp when these opportunities arose.'

He added, however, that financial and investment markets would be nervous and volatile over the next 1-2 years.

'Instead of the rising tide that broadly benefited financial and investment markets for the past 10-20 years, we are now facing choppy seas that could engulf the broader economy globally. Policymakers, business managers and investors will require fortitude and nimbleness to navigate safely through the turbulence.'

Still, he expressed optimism for GIC's future. 'Working together as a team and with the right policies, we will successfully navigate the treacherous currents that lie ahead with sufficient ballast to be able to take advantage of opportunities as they arise. When this turbulent period is over, I am confident that GIC will emerge stronger and more resilient and take its place as one of the most competent and respected investment organisations in the world.'

Dr Tan's speech yesterday to staff and the media, at Swissotel The Stamford, is seen as part of GIC's efforts to be more open about its investments. Set up in 1981 to manage Singapore's foreign reserves, the company is not required to give the same level of detail about its activities as a publicly listed company. But it has made overtures in recent months to be more transparent, without compromising its competitiveness.

GIC is the world's third- largest sovereign wealth fund, with US$330 billion in assets under management, according to Morgan Stanley in February. It ranks behind the Abu Dhabi Investment Authority with US$875 billion and Norway's Government Pension Fund with US$380 billion.