KUALA LUMPUR: Malaysian government officials are dismissing any talk of the country sliding into an economic recession of the kind the US and Europe are currently experiencing, stressing that the RM60 billion economic stimulus package announced by Deputy Prime Minister and Finance Minister Mohamed Najib Razak on March 10, is an important strategy aimed at boosting exports and credit in the financial system.

Najib Razak, who takes over as prime minister of the Barisan Nasional Coalition Government on April 1 from incumbent Abdullah Badawi, believes that a further transformation of the Malaysian economy into a knowledged-based economy is necessary. The finance minister last November announced Malaysia’s first stimulus package of RM7 billion. But the contagious effect of the world financial crisis impacted also on exports and debt in the market.

Najib Razak and the governor of Bank Negara Malaysia (the central bank), Zeti Akhtar Aziz, both agree that the lessons learnt from the 1998 Asian financial crisis which swept Asia, put Malaysia and Asia in a better position to manage the spill-over effects of the current financial turmoil. Most importantly, they stress, that Malaysian banks do not have any exposure to the US subprime CDO market nor to any toxic debt.

Although fourth quarter 2008 saw a negative GDP (gross domestic product) growth, this has been more than mitigated by strong domestic demand, which officials expect to continue, especially in the wake of the latest stimulus package. Malaysia’s foreign reserves are also strong.

Malaysia, during the 1998 Asian financial crisis, was the only country in the region which refused help from the IMF. Instead Muhammed Mahathir, the then prime minister, together with his Finance Minister Tun Daim, established two entities — Danamodal and Danaharta — Special Purpose Vehicles (SPVs) which issued bonds and whose proceeds were used to successfully restructure financial sector and corporate sector debt. There were many other components including the Financial Sector Master Plan and the formation of ten well-capitalized anchor banks.

Years later, even the IMF (International Monetary Fund) acknowledged that Mahathir’s policy was right. Of course he also introduced an exit tax on fund managers, banned speculating in the ringgit, introduced capital controls and pegged the ringgit to the US dollar.

At a banking conference in the Malaysian capital last Wednesday, Nazir Razak, the influential CEO of CIMB Group, one of the top three banking groups in the country, berated the West for studying Sweden’s “bad bank” model to help them in the current “made-in-the-USA” global financial crisis “when it is Malaysia’s Danaharta and Danamodal, and Indonesia’s IBRA (Indonesian Bank Restructuring Agency) that are the most recent success stories. And why is there also such hesitation in looking to Islamic finance as a model for the new global financial architecture?

“Until we see more humility and willingness to absorb all ideas and views, the (advanced economy) is only limiting itself and the world is likely to suffer longer and more,” he told delegates.

Local banks such as CIMB and Al-Rajhi Bank stress that the NPLs (non-performing loans) have actually decreased during the slowdown, although this could change depending on the depth of the contagion effect. But with the new government-backed guarantees, banks are already contemplating increasing their lending activities.

Under its stimulus package, the Malaysian government will set up a Financial Guarantee Institution (FGI) which will help companies and banks to raise RM15 billion of bonds, which could be done conventionally or Islamically. Malaysia is the largest Islamic capital market in the world.

Analysts expect the Malaysian economy to contract by at least 1 percent in 2009. Official forecast of GDP growth in 2009 remains optimistic at between 3 percent to 5 percent, which is much more robust than those of the US and Europe.

The stimulus package is also expected to mitigate the impact of an anticipated 50 percent decline in foreign direct investment (FDI) to RM26 billion in 2009. However, there are some encouraging signs on the export and project fronts. Malaysian trade with its principle partners in East Asia and the Middle East is holding steady.

Bilateral trade with the UAE, for instance, increased a whopping 44 percent to RM20.9 billion in 2008 compared with the previous year. Of this Malaysia exported RM12.5 billion worth of goods (not including services) to the UAE last year. According to Martrade (Malaysian External Trade & Development Corporation), despite the global economic slowdown, some RM40 billion worth of business opportunities are available in the Middle East services sector alone.