Why Malaysia is saved from global firestorm

KUALA LUMPUR, Sept 22 - Business at the offices of AIA Malaysia, a wholly owned subsidiary of the American International Group (AIG), was relatively calm last week, the solvency crisis facing the US company notwithstanding.

While policyholders in some countries rushed in near agitation to cash out their policies for fear that the giant insurer's problems would invariably impact its offices overseas, Malaysia's over a million AIA policyholders appeared less panicked.

Perhaps it had to do with AIA's quick assurances of its well-capitalised state and separate reserves in Malaysia. Over 96 per cent of its total assets are invested in the country, the locally incorporated entity stressed, and insurance policies underwritten by it are direct obligations of its regulated business, "which is subject to stringent local regulatory and capital requirements as prescribed by the Insurance Act and regulations under close supervision by Bank Negara".

But the lack of anxiety has more to do with the belief that Malaysian banks and other local entities are less exposed to the sub-prime implosion, having been less plugged in to global market activities over the past few years.

As CIMB chief Nazir Razak observed, for once, Malaysia's relative insulation, which followed after it imposed capital controls in 1998 to stem capital flight before gradually easing them, might have saved it from the firestorm engulfing international markets, especially the US market.

A lot of effort went into recapitalising weakened local banks and restructuring corporations after the Asian financial crisis, as well as strengthening regulations.

But over time, bits deemed too restrictive have been gradually loosened or liberalised to make the local capital markets more attractive. Investment rules have also been gradually relaxed in part to allow for greater diversity of returns.

For example, unit trust companies can now invest up to 50 per cent of their asset under management overseas. Total investments abroad last year increased by nearly 80 per cent to over RM15 billion, or some 10 per cent of assets under management.

As market regulars, Bank Negara and the Securities Commission probably have a better idea as to the current situation, such as what foreign securities these funds own, for example.

So rapidly has the local unit trust industry expanded in the past five years, Malaysia is said to be Asean's biggest, holding about 45 per cent of market share.

For now, Malaysian banks have denied exposure to sub-prime loans, Maybank being the exception, but its estimated US$35 million exposure is described as a drop in the ocean for Malaysia's largest bank.

As reassuring as it is, as the sub-prime crisis continues to unravel, revealing the many different and complex financial instruments that were used, diced and traded to manage the risks underlining the original inferior loans, the chances of getting caught in the global sticky web appear greater, if not totally inescapable.

Now that trillions of dollars have already been lost, the best-case scenario for Malaysia would be escaping relatively unscathed given the colossal possibilities out there.

If so, Malaysia's relative insularity would have been the unintended silver lining in the dark clouds of 10 years ago. - Singapore Business Times