Economic, political, and market risks will be higher in the coming decade than in the 20 years before the recent crisis, says Tony Tan, deputy chairman of Government Investment Corporation (GIC), Singapore's biggest sovereign wealth fund. As a result, he feels SWFs have an important role to play as suppliers of capital and expertise, something that has also been noted by others.
Speaking on Saturday at the Asia-Pacific Economic Cooperation CEO summit in Singapore, Tan first outlined his view of the global economy. While global depression appears to have been avoided and the short-term economic outlook is positive, significant risks remain, he said, reflecting bearish views he has expressed in the past.
Moreover, the global economic and financial environment has changed "in at least three significant ways, which will increase uncertainty and potential for volatility", Tan says.
First, economic activity in major over-leveraged developed countries, especially consumption in the US and the UK, is unlikely to recover as robustly as in normal recessions. It could take several years for these economies to fully recover from the crisis, says Tan, and they will emerge with much higher and more worrying public debt levels.
Second, economic growth will be distributed unevenly, with key emerging economies outperforming their developed counterparts. On the positive side, an emerging middle class in the developing world will demand new products and services.
But emerging-market performance will also differ. Economies with larger domestic markets and more market-orientated and consistent policies, such as China, Brazil and India, will be better placed to grow than others. And there will be challenges: over time the rise of emerging markets -- especially China, India and Russia -- could, together with competition for limited natural resources, lead to higher geopolitical risks.
Third, Tan expects higher stagnation risk in the medium term to be followed by higher inflation risk. "Over the next one to three years, weak growth and excess capacity will be strongly disinflationary," he says. "However, over the next five to 10 years, policy errors or political pressure could lead central banks to accommodate higher inflation. In addition, robust emerging-market growth could put huge pressure on natural resources and the environment."
All of this is happening in the context of ageing populations, says Tan, especially in developed countries, which dampen growth and savings and put pressure on much-reduced public finances.
"In short, over the next decade it looks like economic, political, and market risks are going to be higher than the last 20 years before this crisis," he says.
As a result, there are three important roles for SWFs, says Tan. First, SWFs are investors that have a long-term horizon that, in the wake of the consolidation of the global financial system, will become important suppliers of global capital. In the future, there will be a premium placed on investors who can look beyond shorter-term performance, he adds.
Second, SWFs have a strong interest in ensuring the global economy and financial system recovers and grows in a vigorous and sustainable manner. They can therefore provide credible insights and analysis of developments in financial markets and economies, says Tan, particularly on issues concerning the restructuring of the global financial architecture.
Third, SWFs want to be responsible market participants and are not out to make quick returns by cutting corners or seeking to contravene legal and regulatory regulations. Tan says SWFs such as GIC -- through their regular interaction with policymakers and regulators worldwide -- can help use their influence to shape policies for better outcomes.
He also highlights the expertise GIC -- and other SWFs - provides. Via their private equity investments, they partner with experts who provide managerial and other skills to companies. "This could be in distressed assets, restructuring and workout situations," adds Tan, "or in emerging markets where companies are growing but talent is thin."
(In its annual report published in September, GIC said it increased its allocations to alternative investments, such as hedge funds, private equity and property, to 30% from 23% in the previous fiscal year. It also indicated that it plans to convert more of its cash holdings into investments in emerging markets and natural resources.)
But all this rests on keeping capital markets open. "If governments close their capital markets to SWFs," said Tan at the Apec summit, "recipient countries will face higher capital costs while SWFs will see their opportunity set decrease."