WORLD leaders need to ensure that they do not draw the wrong lessons as they navigate their countries out of the global financial turmoil, said Dr Tony Tan, deputy chairman and executive director of the Government of Singapore Investment Corp (GIC).
Regardless of how the crisis is resolved, there is little doubt that the turmoil would have an 'indelible impact' on the shape of global finance in the coming years, said Dr Tan yesterday in a speech at the annual meeting of the Institute of International Finance in Washington.
He said that given the size of the problem, state intervention in some form would be needed to stabilise the financial system. As a result, governments will be forced to rethink how they are regulating and supervising the financial sector to safeguard public funds and prevent a recurrence of the current crisis.
In particular, regulation and supervision will be tightened, with real risks of over-regulation.
Protectionism in the United States could rise, while the steady liberalisation of cross-border capital flows could be reversed, he said.
'There is a danger that politicians and policymakers will learn the wrong lessons from the current crisis,' said Dr Tan.
'In the developed world, this could lead to over-regulation and could stifle the healthy development of the financial sector.'
Securitisation, for example, is an important innovation to preserve, said Dr Tan, even if it had contributed to the sub-prime crisis.
Meanwhile, regulators in emerging economies could delay needed liberalisation and hinder innovation, Dr Tan added, and it may take years before securitisation is allowed in these markets to play an optimal role in the new financial landscape.
'Finding the right balance between needed strengthening of regulation and overregulation will be a challenge,' he said.
Dr Tan also expressed his views on the voluntary framework for sovereign wealth funds (SWFs), presented by the International Working Group of Sovereign Wealth Funds (IWG) in Washington last Saturday.
He said GIC welcomes the release of the Generally Accepted Principles and Practices (Gapp) for SWFs, which supports the framework, governance and investment operations of SWFs.
'Publication of the Gapp helps to improve understanding of SWFs as financially-oriented entities in both home and recipient countries, allay protectionist fears and helps to keep the investment climate open and stable,' said Dr Tan.
Said Finance Minister Tharman Shanmugaratnam, who was at the presentation: 'It is important for SWFs to continue building trust with investment recipient countries... Singapore supports the Gapp principles in full.'
Dr Tan said GIC will implement the Gapp appropriately and, where necessary, consult the Government in areas where they have the prerogative.
'In fact, much of the principles and practices are in place in the daily operations of GIC,' he said.
