GIC Says Risk of Shocks May Trigger World Recession `Sooner Than
Expected'
Bloomberg.com, 23 Jul
2010
By Shamim Adam and Netty Ismail -
Jul 23, 2010
The global rebound is “fragile” and shocks could push the world
toward another recession, according to Government of Singapore
Investment Corp., manager of more than $100 billion of the nation’s
foreign reserves.
Risks to the global recovery have increased due to Europe’s debt
turmoil, continued deleveraging in the U.S. and protectionist
pressures, Tony
Tan, deputy chairman of GIC, said in a speech in Singapore
today. The fund is ranked the world’s sixth-largest state
investment company by Sovereign Wealth Fund Institute in
California.
“The economic recovery, while real, is fragile and there is a
risk that negative shocks could push the global economy towards a
recession sooner than expected,” Tan said. “The strong rebound in
global industrial production is peaking while monetary and fiscal
policies, particularly in the larger emerging economies, are being
normalized.”
Policy makers in most developed economies have refrained from
raising interest rates from record lows amid concern the global
recovery will falter. The International Monetary Fund this month
said financial-market turmoil has increased the risks to the
rebound, and Moody’s Investors Service lowered its credit ratings
on Portugal and Ireland.
Bernanke’s Comments
“The challenge for policy makers in many developed economies
will be to convince markets that they have credible plans to ensure
sustainable public finances over the medium to long term, while
minimizing the negative short-term impact on growth,” Tan said.
“While markets have focused on Greece, Portugal, Spain, Ireland and
Italy, this risk remains high for the U.K., U.S., and Japan.”
U.S. Federal Reserve Chairman Ben S.
Bernanke said July 21 the economic outlook remains
“unusually uncertain,” adding to concern the global recovery is
losing steam. The comments sent crude oil and metal prices lower
and triggered declines in stocks in the U.S. and Asia.
Developed economies will take a “long time” to recover fully
from the global crisis and emerging nations such as Brazil, Russia,
India and China will gain importance, Tan said.
The world economy may grow 4 percent in 2010, before expanding
at a more moderate pace next year, he said. Growth in Asia
excluding Japan may reach 8 percent this year, with China and India
expanding 8 percent to 10 percent, Tan estimated.
Emerging Markets
“For investors, the rise of emerging markets will mean that a
larger proportion of their investments will be in these markets,”
he said. “Far from being a risky and perhaps optional part of their
portfolios, emerging markets will become a core and unavoidable
asset class in global portfolios.”
GIC’s investments in stocks accounted for 38 percent of its
portfolio in the year to March 31, 2009, while bond investments
represented 24 percent, according to its annual report released in
September. Allocations to alternative investments, including
private equity, real estate and hedge funds, made up 30 percent of
its portfolio.
GIC bought stakes in Citigroup Inc. and UBS AG in 2008 as
the collapse in the U.S. subprime mortgage market in 2007 froze
credit markets and led to almost $1.8 trillion in losses and
writedowns at financial institutions worldwide.
The global financial crisis of 2008 and 2009 will likely
“accelerate the shift in economic power from the developed to the
emerging world,” Tan said. “Asia is at the cusp of the next stage
in its development.”
Domestic demand will be a key source of Asia’s economic growth,
which has been largely dependent on exports, and “extensive”
infrastructure investment will be needed as cities develop, Tan
said. Higher wages and investment inflows will over time result in
“significantly stronger currencies” in the region, he said.
The need for capital to finance Asia’s growth will also fuel the
growth of the region’s foreign-exchange, bond and equity markets as
well as its financial institutions, he said. Asia, led by China,
will also increase research and development of technologies that
address environmental constraints such as renewable technology, he
said.
To contact the reporter on this story: Shamim
Adam in Singapore at [email protected]
