GIC Says Risk of Shocks May Trigger World Recession `Sooner Than Expected'

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.

“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.”

Bernanke’s Comments

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.”

As posted in Bloomberg by Shamim Adam and Netty Ismail