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Thursday, 2 August 2007

GIC ready for possible dark clouds despite bright economic outlook

SINGAPORE : It is a Goldilocks global economy now — not too hot, not too cold, but just right — according to some economists, and the bears have not come home, yet.

On Tuesday, Dr Tony Tan named three dark clouds — or bears — on the horizon that have caught the attention of the Government of Singapore Investment Corporation (GIC).

First, the economy might get hot if the price of oil, now $70 per barrel, reaches $100 per barrel as some have predicted. "What this will do to inflation is a worry," said Dr Tan, who is the GIC deputy chairman and executive director.

Secondly, the economy could cool if a tightening of credit is caused by the crisis in the United States sub-prime market, where up to 2.2 million people are at risk of forfeiting their homes.

"If that's the case, the sea of liquidity, which is a rising tide lifting up the prices of all assets, may be dampened," said Dr Tan, speaking to reporters after a GIC event.

The third risk is that of an external shock, such as a large terrorist attack or an avian flu epidemic. "The prices which people are buying assets (at) can only be justified if things continue to do well, earnings continue to increase. But if the world is hit by an exogenous shock... then prices can decline as quickly as they've risen, as we've seen in 2003 (when Sars struck)," he said.

The Dow Jones industrials dropping almost 500 points last week, affecting other markets, is an example of the slight "turmoil" that is "of concern to everyone", he added.

For its part, the GIC, "a conservative investor", has taken "necessary precautions" against any kind of risk. "If banks start to tighten up, this will cause difficulties for all investors. GIC is always on the watch for this and to take steps," Dr Tan said.

The GIC, which manages more than US$100 billion ($151.1 billion) of Singapore's foreign reserves, has earned an 8.2 per cent annual return in Singapore dollars since its inception in 1981.

As a sovereign wealth fund, there is a developing issue GIC also must consider: The increasing number of countries establishing similar funds. "If it were only a few countries — Singapore, Abu Dhabi — who have sovereign wealth funds, we would not be particularly worried," said Dr Tan.

But with more of these funds, the impact on the global financial system and international fund flows is an issue that requires "a lot of thought and discussion".

He added: "Singapore has a stake in having an open global system, where funds can flow freely. Other governments, I'm sure, will want the same. The last thing we want is protectionism developing in another form."

Last week's £5.4-billion ($16.5-billion) investment in Britain's Barclays by Temasek Holdings and the state-owned China Development Bank sparked concerns in some quarters about the level of transparency that sovereign investors exercise.

Dr Tan also announced the establishment of a GIC school that will provide a coherent structure for training and development of its staff in portfolio management.

The GIC also welcomed 17 graduates from Singapore, Canada, China, India and the United Kingdom, who have completed its inaugural one-year foundational portfolio management programme and will now be assigned to various investment areas.

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