By GAN KIM KHOON

As stock markets around the world reel from the prospect of a U.S. economic recession, and banking institutions in the major economies suffer huge losses from their investments in securities that are backed by sub-prime mortgages in the U.S., the Malaysian economy, in the face of all these global economic woes, stands resilient.

Although the U.S. remains Malaysia’s largest trading partner, and one thus might think that a recession in the U.S. would negatively impact Malaysia, the country’s dependence on the U.S. as a consumer of Malaysian goods has lessened over the years. Trade between Malaysia and China and with the European Union has been picking up faster than trade with the U.S. in the last few years. Gross exports by Malaysia to the U.S. have gradually declined from 18.8 percent of Malaysia’s total gross exports in 2004 to 16.1 percent in the first nine months of 2007. On the other hand, exports to China and the European Union have grown from 19.3 percent in 2004 to 21.5 percent in 2007, representing an average growth rate of 12 percent per year.

As a result of robust trade, Malaysia’s international reserves now stand at a record US$101.3 billion as of 31 December 2007. This represents a nearly seven-fold increase from the external reserves position of only US$15.3 billion at the end of 1997, when the economies of Malaysia and other Asian countries were pulverized by the Asian financial crisis.

As a net exporter of crude oil, Malaysia also benefits from the current high crude oil prices (circa US$110 per barrel at time of writing). Although not a major producer—Malaysia produces only about 600,000 barrels per day—the steep rise in crude oil prices in recent months has bolstered the country’s revenue and international reserves as well as helped it weather the negative effects of high energy prices.

Apart from enjoying a windfall from high crude oil prices, Malaysia is also benefiting from the historical high prices of crude palm oil. Malaysia is the world’s largest producer of the oil. Prices of crude palm oil futures recently hit an all-time high of US$1,045 per ton, which is up 77 percent from US$589 per ton a year ago. This is expected to boost the country’s export receipts further.

At the same time, the Malaysian currency, the ringgit (RM), has been steadily strengthening against the U.S. dollar. At the time of writing, the ringgit was last traded at RM3.24 to US$1. This represents an appreciation of 14.6 percent since the ringgit was de-pegged from the U.S. dollar back in July 2005. The stronger ringgit has helped to reduce the country’s import bills in ringgit terms. It has also helped curtail imported inflation. Partly as a consequence of the stronger ringgit, Malaysia has been able to maintain its consumer price index (or its inflation index) at below 4 percent per annum, which augurs well for economic growth.

With inflation under control, the country’s central bank, Bank Negara Malaysia, has been able to adopt an accommodative monetary policy that is conducive for sustainable economic growth in the country. The central bank’s benchmark overnight policy rate has remained unchanged at 3.50 percent since April 2006. This relatively low interest rate has enabled total loans in the banking system to record a double-digit growth rate (10.2 percent year-on-year) in 2007.

Better yet, the relatively healthy loans growth in the banking system did not come at the expense of asset quality. On the contrary, the ratio of net non-performing loans in the country’s banking system has been steadily declining to only 3.3 percent, as of the end of 2007.

Malaysian banks are also unscathed from the sub-prime mortgage crisis in the U.S., as the collective exposure of Malaysian banks (both direct and indirect) to the sub-prime mortgage-backed CDOs is estimated to be less than US$100 million.

With all the above inherent strengths and characteristics, the Malaysian economy is expected to be able to withstand the anticipated slowdown in global economic growth as well as a recession in the U.S., if the latter happens.

[The author is a Director and Head of Equity Capital Markets at OSK Investment Bank Bhd, an investment bank licensed by Bank Negara Malaysia].