August 22, 2008

Recession report - May become worst in last 30 years

Government of Singapore Investment Corp, the sovereign fund that has invested about USD 18 billion in UBS and Citigroup since December, said the world economy may be headed for its worst recession in three decades.

Mr Tony Tan, deputy chairman of GIC in a speech to more than 500 employees in Singapore said that “We could be facing a recession which is longer, deeper and wider than any recession that we have encountered in the last 30 years.”

Mr Tan said that GIC, which oversees more than USD 100 billion, faces its most challenging years since being founded 27 years ago, as the global supply of credit contracts. His remarks come as the fund considers investing more in UBS, which is reeling from USD 38 billion of writedowns.

Mr Guy de Blonay a director at New Star Asset Management in London, which manages USD 1.2 billion in financial stocks said that “The banking industry will probably be the worst affected by a global recession.” He added that “You cannot rule out the possibility of an operating environment for banks taking a sharp turn for the worse. Indeed, history suggests that a deep banking crisis is not over until the sector has been subject to broad re-capitalization and management shake ups.”

The International Monetary Fund this month changed its forecast for global economic growth to 3.7% for 2008 from an earlier projection of 4.1%. It also said there's a 25% chance of a world recession, citing the worst financial crisis in the US since the Great Depression.

Mr Tan said that “The next years may well be among the most challenging years for GIC since our establishment. 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.”