Identifier
Created
Classification
Origin
06KUALALUMPUR1390
2006-07-27 09:06:00
UNCLASSIFIED
Embassy Kuala Lumpur
Cable title:  

Dueling Forecasts: Malaysia Economic Update

Tags:  ECON EFIN EINV EPET MY 
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VZCZCXRO2548
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #1390/01 2080906
ZNR UUUUU ZZH
R 270906Z JUL 06
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 7196
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 1419
RUCNASE/ASEAN MEMBER COLLECTIVE
UNCLAS SECTION 01 OF 03 KUALA LUMPUR 001390 

SIPDIS

STATE PASS USTR - WEISEL AND JENSEN
STATE PASS FEDERAL RESERVE AND EXIMBANK
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN
USDOC FOR 4430/MAC/EAP/J.BAKER
TREASURY FOR OASIA AND IRS
GENEVA FOR USTR

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV EPET MY
SUBJECT: Dueling Forecasts: Malaysia Economic Update
for July 2006

REF: Kuala Lumpur 0797

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 001390

SIPDIS

STATE PASS USTR - WEISEL AND JENSEN
STATE PASS FEDERAL RESERVE AND EXIMBANK
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN
USDOC FOR 4430/MAC/EAP/J.BAKER
TREASURY FOR OASIA AND IRS
GENEVA FOR USTR

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV EPET MY
SUBJECT: Dueling Forecasts: Malaysia Economic Update
for July 2006

REF: Kuala Lumpur 0797


1. (U) Summary: Government officials insist that the
economy is on track to meet their target of 6.0% growth
in 2006, but Malaysia's most prestigious private
forecaster recently downgraded its forecast to 5.2%.
Private inflation forecasts are more in line with the
Central Bank's projection of 3.5-4.0% for the year,
though private analysts expect inflation to be at the
top of that range. The government says it is satisfied
with the current ringgit exchange rate, but most
private analysts believe it remains undervalued a year
after its depegging from the dollar. Meanwhile, in the
working world, private firms are complaining about a
shortage of skilled labor. End Summary.

Private Economists Forecast a Slower 2006
--------------


2. (U) The Malaysian Institute of Economic Research
(MIER) has revised downwards its growth forecast for
2006 from 5.5% to 5.2%. Most private forecasts are now
in the 5.0%-5.5% range. MIER expects growth to slow
even further in 2007 to 4.8%. Speaking at a July 24
economic briefing, MIER Executive Director Dr. Mohamed
Ariff said he expects domestic demand to decrease due
to higher oil prices and interest rates. He also
expects the world economy to decelerate in 2007,
leading to lower demand for Malaysia's exports. While
domestic investment will increase with the
implementation of the Ninth Malaysian Plan (9MP; the
government's five-year development plan),Dr. Ariff
anticipated a lag before 9MP projects could be
translated into growth boosting activities.

Government Officials Remain Optimistic
--------------


3. (U) At the same July 24 seminar, Deputy Finance
Minister Ng Yen Yen told reporters the government is
confident of 6.0% percent growth in 2006. "The
government has "put in place initiatives to unleash the
power of the private sector," she asserted.
Separately, Finance Minister II Nor Mohamed Yakcop also

upheld the 6.0% growth target this year. However, he
covered himself by saying if there were to be any
revision of the target rate, Prime Minister Abdullah
would announce it when he tables the 2007 Malaysian
Budget on September 1. (Comment: The difference
between 6.0% and 5.0% is politically significant. The
Ninth Malaysia Plan projects an average growth rate of
6.0% for 2006-2010 (see reftel). It will be very hard
to achieve this average if economic growth falls short
in the initial years.)

Inflation Lingers
--------------


4. (U) Malaysia's consumer price index (CPI) rose a
lower than expected 3.9% year-on-year in June, after
recording a similar increase in May. Analysts expected
higher inflation following the government's June 1
approval of a 12% increase in electricity rates. The
CPI also increased 3.9% year-on-year for January
through June in 2006. MIER's Dr. Ariff said inflation
is a major concern, especially the secondary effects on
prices of goods following increases in transportation
and energy costs. Ariff noted, however, that
Malaysia's inflation is cost-pushed, which tends to
produce a one-off surge in prices. He did not expect a
further boost unless oil prices escalate to a much
higher level. MIER projects 4.0% inflation in 2006 and
3.3% in 2007.

Interest Rate Expectations
--------------


5. (U) Mirroring Dr. Ariff, Bank Negara Governor Zeti
Akhtar Aziz told reporters in Jakarta July 25 that the
inflation rate might average 3.5% to 4.0% this year as
there had been no "second-round" effects from higher
fuel and electricity prices. Zeti observed that if

KUALA LUMP 00001390 002 OF 003


inflation is cost-pushed, then there needed to be
adjustments in the real economy and a prompt monetary
response might not be warranted. Her remarks split
analysts' views as to whether the Central Bank will
raise the overnight policy rate (OPR) by another 25
basis points at the next monetary policy meeting July

28. The OPR currently is 3.5%. Interest rate
differentials between the Malaysian and U.S. rates
remain wide at 175 basis points. Lee Heng Guie, chief
economist at CIMB bank, who had previously predicted
another rate hike, is not so sure now. He nevertheless
believes Bank Negara will need to increase the rate by
another 25 basis points before the end of the year.
(Comment: Even with a 25 point increase, the OPR would
still be negative in real terms at current rates of
inflation.)


6. (U) Commenting on interest rates, Dr. Ariff urged
Bank Negara not to rush into raising rates as it could
hurt the economy if external demand slackens in the
fourth quarter. He argued for keeping lending rates
unchanged, but forcing deposit rates up, as he believes
the profit margin of banks remains wide. (Comment:
Local bankers would not agree.) However, Ariff
admitted that there is space for upward adjustment in
both lending and deposit rates.

The Depegged Ringgit - One Year Old
--------------


7. (U) On July 21, the ringgit celebrated the first
anniversary of the removal of its RM 3.8 to $1.00 peg.
After one year the ringgit has appreciated just 2.8%
against the dollar, and currently states at RM 3.693 to
the dollar. On May 10, the ringgit hit an 8-year high
to reach 3.57 against the dollar, but it since has
weakened along with other regional currencies.
Rebutting an earlier press report that he was not
pleased with the ringgit performance, Finance Minister
II Nor Mohamed Yakcop said the government was not
concerned as international market forces determine the
currency's floating rate. Most private economists
continue to believe the ringgit is undervalued. MIER's
Dr. Ariff expects the currency to appreciate to RM 3.5
to $1.00 by the end of the year.

Help Wanted
--------------


8. (U) Despite widespread stories in the press
alleging that there are thousands of unemployed
Malaysian college graduates, many firms maintain that
there is a significant shortage of qualified workers in
the labor market. New evidence for this comes from a
survey of small and medium sized enterprises (SME's)
conducted by the Socioeconomic and Environmental
Research Institute (SERI) of Penang. Penang is
arguably Malaysia's most developed state, but 100% of
the responding firms cited a shortage of skilled
workers as a matter of concern. 58% complained about
low worker productivity, while 38% expressed
dissatisfaction with Malaysian labor laws that make it
difficult to fire unproductive or troublesome workers.


9. (U) SERI's research suggests that Penang (and
probably other Malaysian) SME's face a significant
disadvantage in the competition for highly qualified
workers as they cannot compete with the pay levels
offered by multinational corporations (MNC's). The
idea of using stock and profit sharing mechanisms as an
incentive to attract workers to start up ventures has
yet to take hold in Malaysia. The survey found that
the average salary for a newly-hired engineer with a
master's degree was RM 2,500-RM 3,000 per month (about
$675-$810). Average earnings for a skilled production
worker were RM 30 or more per day (about $8.10).


10. (U) Comment: The SERI survey results suggest two
conclusions. First, the shortage of qualified workers
in Malaysia is real and if not addressed could become a
drag on the economy. Second, the extra challenges
facing SME's may limit the expansion of locally-grown

KUALA LUMP 00001390 003 OF 003


enterprises, leaving Malaysia more dependent on
investment by MNC's for its future growth and
development. A third thought is that the Malaysian
government may need to consider ways to steer college
students towards academic programs that would make them
more employable.

LAFLEUR