April 21, 2008 / 3:41 AM / 11 years ago

UPDATE 2-Singapore's GIC warns global recession, crisis likely

(Updates throughout)

By Kevin Lim and Jan Dahinten

SINGAPORE, April 21 (Reuters) - Singapore’s biggest sovereign wealth fund said on Monday a global recession was increasingly likely but defended its multi-billion dollar bets on Citigroup (C.N) and UBS UBSN.VX as providing good long-term returns.

Sovereign wealth funds globally have poured billions of dollars into major U.S. banks reeling from writedowns linked to U.S. subprime mortgages, which have sparked a global credit crisis.

The Government of Singapore Investment Corp (GIC), which analysts estimate could manage as much as $300 billion, said the financial turmoil would leave markets extremely volatile over the next one to two years.

“The financial contagion has now spread beyond U.S. shores, increasing the likelihood of a global financial crisis and recession,” Deputy Chairman Tony Tan said at GIC’s inaugural staff conference on Monday.

“We could be facing a recession which is longer, deeper and wider than any recession we have encountered in the last 30 years,” he said.

Tan made his comments at a staff conference to which the media had been invited. But, GIC declined to answer media queries.

The corporation, which says on its Web site that it manages “well above $100 billion”, rarely communicates with the media but has made efforts in recent months to be more responsive.

GIC invested 11 billion Swiss francs ($11 billion) in mandatory convertible notes in UBS last December after the Swiss bank sought capital following losses related to the U.S. subprime mortgage market.

In January, it invested $6.88 billion in Citigroup. Stocks in both banks have slid this year [ID:nN20388254].

“We regard our investments in UBS and Citigroup as long-term investments which will give us good returns when markets stabilise and economic conditions return to more normal levels,” Tan said.

GIC has said previously it had not yet decided whether to participate in UBS’ subsequent 15 billion franc rights issue.


Tan said that GIC had prepared for the current market turmoil by taking a more conservative stance in its investment portfolio by selling stocks in the third quarter and holding more cash.

“We are now entering a period of extreme uncertainty in the world economy and the global financial markets. As banks continue to deleverage, cutting down on their lending activities and causing contraction in credit supply, the prospects for the U.S. economy and even the world economy are fraught with considerable downside risks,” he said.

The International Monetary Fund earlier this month lowered its 2008 outlook for world economic growth for the second time this year, cutting it to 3.7 percent — its lowest since 2002 — from a January forecast of 4.1 percent.

The IMF expects a mild U.S. recession this year but overall growth of 0.5 percent before economic activity picks up in 2009.

Stake building by sovereign wealth funds have raised concerns in the West that foreign governments might be investing for political rather than financial gain and may one day use the stakes to advance national interests.

Singapore and Abu Dhabi last month said they would provide more disclosure about their assets and promised their investments would be based on commercial and not political decisions, following an agreement with the U.S. Treasury.

Morgan Stanley said in February that GIC was the world’s third-largest sovereign wealth fund with $330 billion in assets under management, behind the Abu Dhabi Investment Authority with $875 billion and Norway’s Government Pension Fund with $380 billion.

Temasek Holdings [TEM.UL], Singapore’s only other sovereign wealth fund, has to date invested $5 billion in Merrill Lynch MER.N.

According to Morgan Stanley, Temasek manages $159.2 billion and is the world’s seventh-largest sovereign wealth fund. ($1=.9978 Swiss Franc) (Editing by Neil Chatterjee and Neil Fullick)

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