Singapore plays bank saviour again

17 Jan 08

GIC and Temasek, both of which were created by the government of Singapore as investment vehicles, have committed substantial investments in a number of foreign banks, a move being perceived as an attempt to play a highly potent role in global financial markets.

Singapore’s multi-billion-dollar investment in Citigroup marks the third time in a month that the city-state has stepped in to help shore up an ailing global financial institution.

The Government of Singapore Investment Corporation (GIC) said on 15 January it would invest $6.88 billion in the US banking giant, whose finances have been battered by a US housing slump.

The GIC said last month it would pump almost $10 billion into Swiss bank UBS, while state-linked investment firm Temasek Holdings committed to injecting $4.4 billion into US brokerage Merrill Lynch.

“Anybody coming in with liquidity will be very fortunate in buying into these companies at discount,” said Ilian Mihov, an economics professor at graduate business school Insead in Singapore.

“They have ample liquidity and they’re getting very good terms,” he said.

GIC and Temasek are both sovereign wealth funds – a form of government-created investment vehicle which has emerged as a potent force on global financial markets.

GIC was formed in 1981, managing only a few billion dollars of the city-state’s foreign reserves. Today it says it manages “well above” $100 billion, and analysts say the true figure could be 300 billion or more.

The large Citigroup and UBS stakes are “a bit of a departure” for the traditionally conservative GIC, said Leon Perera, group managing director of Spire Research and Consulting in Singapore.

“I think it’s opportunistic,” he said.

Temasek says its net portfolio is now worth more than $100 billion and Citigroup Global Markets in October listed both Temasek and GIC as among the largest sovereign wealth funds in the world.

With their newfound market muscle, however, such funds have led to concerns over a lack of transparency and national security in recipient countries.

“Sovereign wealth funds are inescapably political. They are government-owned and government-controlled entities,” Perera said.

Nine of the biggest 22 funds were only created this decade, and overall sovereign fund assets are bigger than private equity or hedge funds, Gerard Lyons, chief economist for London-based Standard Chartered bank, said in Singapore shortly before Citigroup’s announcement.

“In essence the big issue was that Russia and China now have funds, and that makes the Western world a bit uneasy,” Lyons said.

“There certainly will be people who are concerned because not all of these funds are driven by commercial reasons.”

Singapore’s founding father Lee Kuan Yew – now GIC’s chairman – said last week that he does not see a backlash against the Singapore funds.

“We are no threat,” he said.

Some analysts believe the growing roster of foreign governments investing in Wall Street could soon spark congressional hearings.

But Perera said there should be minimal political fallout for Singapore because it “doesn’t have the kind of baggage” that the Middle East or China carries.

Along with GIC, the Kuwait Investment Authority sovereign wealth fund, Prince Alwaleed bin Talal bin Abdulaziz of Saudi Arabia and former Citigroup chief executive Sanford Weill are all injecting cash into Citigroup.

Citigroup, America’s second-largest financial institution by market worth, unveiled the financial backing as it revealed a fourth-quarter net loss of $9.83 billion and $18 billion in writedowns – largely because of increased mortgage investment losses.

It said it had raised $14.5 billion in fresh capital, with the largest chunk coming from GIC.

Citigroup also raised $7.5 billion in late November from the state-run Abu Dhabi Investment Authority of the United Arab Emirates, the world’s biggest sovereign wealth fund.

Similar Asian and Middle Eastern investments are likely, Perera said.

With a weakened US dollar, “Now would be the time to buy into US-dollar assets,” he said.