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SINGAPORE : Sovereign Wealth Funds, or SWFs, are here to stay and it can help companies tide over financial difficulties.
But it is vital to have a proper code of good practices in place to govern their operations.
This is the view of Dr Tony Tan, Deputy Chairman of the Government of Singapore Investment Corporation (GIC), who added that his one big worry for Singapore in 2008 is rising inflation.
He said: "My overall worry for 2008, even more than this economic recession is inflation. Oil prices are high, food prices are going up, we've already felt the effects in Singapore. And the biggest worry to the world economy is if inflation comes back and increases, then I think this would have very serious effects for the US economy, for the economies of the whole world and ultimately for Singapore."
He was speaking to Singapore reporters on the sidelines of the World Economic Forum.
The US sub-prime mortgage crisis sent stock prices reeling recently and reputable banks like UBS and Citigroup had to source for investments in order to write off bad loans.
The GIC pumped in more than US$16 billion, or over S$22 billion, into these two financial institutions.
And Dr Tan said it did so for long-term investment, and not to bail out the banks or help stabilise the US financial system.
He said GIC takes a conservative approach to investments and adhere strictly to risk perimeters.
He said GIC has a responsibility to the government and people of Singapore to make sure funds are managed for the good of the citizens.
He said "it's not our job to try to be a white knight to save the world's economic system. That's the job of the IMF."
Dr Tan said: "We always look at the risk first. Whether it comes within our risk management framework, whether it's not excessive. Having decided that the risk is acceptable, then we look at the returns. Our philosophy is if you look after the downside, the upside will look after itself."
The financial climate has become volatile recently, but Dr Tan is not concerned about what will happen in the first half of this year.
Instead, he is more worried if the recession continues in the second half of the year: "Even if there's a recession and these measures taken by the Feds and the US government succeeds in stabilising the economic environment and the economy starts to recover, maybe second quarter, third quarter, then basically it's a normal adjustment.
"We've had three to four very good years, when markets were rising, economies were expanding, credit was widely available, so every fund manager, including GIC did very well. I mean we all look like geniuses. But it's easy to do well in a rising market. Not so easy to do well in choppy market or in a downturn."
In Davos, the subject of Sovereign Wealth Funds became the flavour of the week.
Dr Tan who met with several finance ministers and CEOs discussed this matter extensively.
Many wanted to know what GIC does and why it is investing so much money in UBS and Citigroup.
So Dr Tan believes that the way forward is to make GIC's investments more transparent, allowing people to have a better understanding and to allay any fears that may arise from it.
Dr Tan said he supports the IMF idea for a code of best practices for SWFs, but said the proposals are still preliminary.
Dr Tan said: "The SWFs are here to stay and that's why we believe it's good to have some form of better understanding, some form of code of good practices so that the operations of the SWFs and the reactions of the recipient countries will not lead to further problems. Because the SWFs can play a role. They're not going to go away. It's just a matter of working out the process whereby they can continue their operations which is good for them and good for the companies in which they invest."
On GIC's part, Dr Tan said it will provide more information on its processes, governance and investment motivations by the second quarter of this year.
As for the code of best practices to be formulated under the IMF, Dr Tan said it should be based on factors like flexibility, avoid being too prescriptive and be made voluntary to some extent.
The code should also not disadvantage the SWF countries.
It should factor in clarifications on the purpose of the SWF investment and how the funds are governed.
Dr Tan also revealed that GIC has decided not to take a seat on the UBS board of directors.
As GIC invests in many other banks, it would not be appropriate to do so.
In addition, GIC's investment is not intended to control UBS or have a say in the management of the bank. - CNA/ch
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