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Yoolim Lee & Liza Lin
Government of Singapore Investment Corporation (GIC), the sovereign fund that has invested about $18bn in UBS and Citigroup since December, said yesterday the world economy could be headed for its worst recession in three decades.
Sovereign wealth funds from Asia and the Middle East have become more influential in financial markets after pouring billions of dollars into big banks on Wall Street and Europe that were reeling from losses related to the US mortgage market.
“We could be facing a recession which is longer, deeper and wider than any we have encountered in the past 30 years,” Tony Tan Keng Yam, deputy chairman of GIC, as the company is known, told more than 500 employees in Singapore. He said GIC, which oversees more than $100bn, was facing the “most challenging” of its 27 years as the global supply of credit contracted.
GIC is considering investing more in UBS, which is reeling from $38bn of write-downs.
Guy de Blonay, a director at New Star Asset Management in London, said the banking industry would probably be the worst affected by a global recession.
“You cannot rule out the possibility of the operating environment for banks taking a sharp turn for the worse,” he said.
“Indeed, history suggests a deep banking crisis is not over until the sector has been subject to broad recapitalisation and management shake-ups.”
This month the International Monetary Fund (IMF) lowered its forecast for 2008 global economic to 3,7% from 4,1%. It said there was a 25% chance of a world recession, citing the worst financial crisis in the US since the Great Depression. The reduction was the IMF’s third since July, when it said the world economy would cope with the US credit squeeze and grow 5,2% this year.
Tan told his employees yesterday that they were entering a period of “extreme uncertainty”.
“The next years may well be among the most challenging for GIC. As banks continue to deleverage, cutting down on their lending activities and causing contraction in credit supply, the prospects for the US economy and possibly even the world economy are fraught with considerable downside risks.”
Adding to the challenges, sovereign wealth funds face more scrutiny by the US and European governments. The US is pushing the government-run funds to agree to guidelines being drafted by the IMF and the Organisation for Economic Co-operation and Development.
US Treasury Secretary Henry Paulson and sovereign wealth funds of Abu Dhabi and Singapore agreed last month to adopt rules for greater disclosure.
The efforts are aimed in part to head off protectionist sentiment in the US Congress against foreign investors.