GDP Shrinking 8% May Be Probable

This story by Reuters appeared in AsiaOne News on 5 March 2009:

GDP shrinking 8% may be probable
By Kevin Lim and Neil Chatterjee

SINGAPORE - Singapore's top wealth fund GIC is looking at investing in property and private equity, after rushing into global banks "too early" and seeing its multi-billion dollar portfolio slide 25 per cent from its peak.

Lee Kuan Yew, chairman of GIC, one of the world's top wealth funds, told Reuters on Wednesday he saw the healthcare sector as being resilient to the downturn, but he said the financial sector would recover.

"We'll most probably stay with the financials," Lee said in an interview. "Eventually, it must recover. It is the circulation system of the world."

Prime minister of Singapore from 1959 to 1990, Lee said GIC can weather the storm for 10 years if necessary but the city-state's economy could shrink 8 per cent this year as demand for its exports slides.

Lee said GIC bought "too early" into global banks such as Citigroup and UBS, which were both hammered by the financial meltdown that quickened in the second half of 2008.

"How could we have known this was the extent of the damage? You look at all the big-name banks that have gone down, misjudged the situation, ruined their careers," he said.

"When the market fell, we went into UBS and Citi. But we went in too early. That is part of the ride."

GIC last week converted its $6.88 billion worth of Citigroup preference shares into common stock at a price of S$3.25 a share to shore up the embattled U.S. lender, realising in the process a loss of around half its investment.

Analysts estimated that the value of the fund was around $300 billion a year ago, although GIC has only said it manages well over $100 billion.

"A 25 per cent decline would probably suggest an out-performance against the global markets," said Song Seng Wun, economist at Malaysian bank CIMB in Singapore.

The MSCI World Index reached a peak in November 2007 and has fallen almost 60 per cent since then. GIC will have been shielded by its high bond and cash holdings.

Singapore's other wealth fund, Temasek, also piled into Western banks such as Merrill Lynch, now part of Bank of America. Its portfolio shrank 31 per cent - or by S$58 billion - in the eight months to end-November.

Sharp economic contraction

Lee said a contraction of 8 per cent in Singapore's gross domestic product this year was a possibility and now becoming a probability due to weak exports to its key Western markets. And a further 30-40 per cent drop in exports in the second quarter would mean the economy might shrink 10 per cent this year, he said.

"We have to depend on world markets ... there's no running away from it, they must recover before we bounce back. But when they do recover, we will bounce back faster than anybody else," Lee said.

Singapore tapped its reserves, which include GIC's funds, for the first time in January to help fund a $20.5 billion budget stimulus package to shield the economy by helping companies, saving jobs and bringing forward infrastructure projects.

"We saved for the rainy days and the rains have come," 85-year-old Lee said.