SCENESETTER FOR VISIT TO MALAYSIA OF USTR

C O N F I D E N T I A L SECTION 01 OF 02 KUALA LUMPUR 000419

SIPDIS

SIPDIS

STATE PASS USTR FOR B. WEISEL AND J. JENSEN
USDOC FOR 4430/MAC/EAP D.BISBEE AND J. BAKER

E.O. 12958: DECL: 03/09/2016
TAGS: ETRD ECON PREL PGOV MY
SUBJECT: SCENESETTER FOR VISIT TO MALAYSIA OF USTR
AMBASSADOR KARAN BHATIA

Classified By: Deputy Chief of Mission David Shear for reasons 1.4 (B a
nd D)


1. (C) SUMMARY: Malaysian-American relations are good and
improving; the March 8 rollout of the FTA added momentum to
the upward trend. This moderate Muslim-majority state is our
tenth-largest trading partner worldwide, and is a reliable,
if quiet, partner in the fight against terrorism. While
moving slowly away from the anti-Western rhetoric of
former-Prime Minister Mahathir, Malaysia continues to oppose
us on some key international issues. In the economic arena,
there still are some who champion the paradigm of north-south
conflict, despite the role that economic globalization has
played in Malaysia's development. "Bumiputera" preferences
for ethnic Malays remain strongly entrenched across wide
swaths of the economy. Despite this, the government appears
strongly committed to the FTA negotiations. While there are
limits to the price they are willing to pay, Malaysian
leaders see an FTA as necessary to maintaining the country's
economic competitiveness within the Asia-Pacific region.
They will be looking to us for innovative compromises that
will permit them to pursue their domestic socio-economic
goals, while still meeting the requirements of a
comprehensive FTA. End Summary.

Political Landscape
--------------


2. (C) While Malaysia has plenty of warts, it remains a rare
example of an Islamic-majority country that is stable,
civilian-led and prosperous. Malaysia has also maintained a
largely tolerant social system and a tightly managed
democracy, with the same multi-racial coalition in power
since independence in 1957. While we continue to urge the
government of Malaysia to improve its own governance, we also
recognize the constructive role Malaysia can play in the
Islamic world and have encouraged Malaysians to increase
support for moderation and progress in the Middle East.


3. (C) Prime Minister Abdullah Badawi is a breath of fresh
air after the long-serving and vituperative Mahathir Mohamad,
who retired in late 2003. Abdullah promotes a tolerant,
progressive approach to religion that he calls "Islam
Hadhari" (civilizational Islam). He is publicly committed to
fighting corruption and reining in costly mega-projects,
though his government's follow-through has been
disappointing. His mild-mannered and cautious approach has
also led critics to question his leadership and
effectiveness, but his ruling coalition remains secure.
Abdullah's chief potential rival, Deputy Prime Minister (and
Defense Minister) Najib Razak, plays for now the role of a
loyal bulwark. After two years in power, Abdullah has
appealed to the public for patience in delivering reform. As
long as the economy continues to grow healthily, the public
will grant him that.

Economic Situation
--------------


4. (C) In his early days, PM Abdullah made rural development
and control of government spending, partly as a means to
encourage private sector led growth, his top economic
priorities. So far, only his reduction of the government's
deficit - now down to 3.8 percent of GDP - can be chalked up
as a clear success. Abdullah's partisans say that the Ninth
Malaysia Plan (NMP; a five year plan for economic policy and
development spending) will be the vehicle for advancing his
other economic goals, but the NMP will only be unveiled at
the end of this month.


5. (C) Meanwhile cuts in government subsidies for gasoline
and diesel fuel - one of the steps taken to rein in the
deficit - have proved highly unpopular, and raised concerns
about inflation. Increases in prices of other
government-managed commodities, such as electricity, may be
in the works. For now, the economy is in reasonably good
shape, with projected growth of around 5.5 percent in 2006
and official inflation of around 3.5 percent (although
private analysts believe the real rate of price increases is
higher). However, the government may be facing a tough
choice in the coming year between stimulating the economy to
get back on a higher growth track, or raising interest rates
to control inflation.

Malaysia's International Posture
--------------


6. (C) Malaysia currently is the chair of the Non-Aligned

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Movement (NAM),the Organization of the Islamic Conference
(OIC) and of ASEAN. Malaysia hosted the ASEAN Summit and the
East Asia Summit last December, and will host the ASEAN
Regional Forum ministerial this summer. Secretary of State
Rice has told the ASEAN foreign ministers of her plans to
attend the ARF meetings in July. Malaysia backs the
six-party DPRK nuclear talks and supports Iraqi
reconstruction efforts, but has been overeager to embrace
Hamas and defend the Iranian nuclear program. The foreign
ministry seems to be moving slowly away from some of
Mahathir's anti-Western rhetoric and policies, but retains
friendships with troublesome states like Cuba, Zimbabwe,
Sudan, Syria and Uzbekistan. The Malaysian government is
publicly supportive of China's "peaceful rise" and recently
signed a defense cooperation MOU with China, despite
lingering suspicions among senior Malaysian military
officials of China's long-term intentions. Malaysia has
actively supported peace efforts in the southern Philippines
and Aceh in Indonesia.

Counterterrorism
--------------


7. (C) Malaysia generally has been a reliable and
constructive partner on counterterrorism. In 2003, Malaysia
established the Southeast Asia Regional Center for
Counterterrorism (SEARCCT),which now runs a full schedule of
multilateral training courses, many conducted with U.S.
support. While the Malaysian leadership firmly opposes
terrorist organizations at home, it is deeply uncomfortable
with any association of Islam with terrorism, and frequently
lectures us on the need to eschew terms such as "Islamic
terrorists."

The FTA Negotiations
--------------


8. (C) The Malaysian Cabinet gave its approval in December to
begin negotiations on an FTA. We have heard that the Finance
Ministry was the only agency that opposed the negotiations in
the preliminary discussions, but that the whole Cabinet voted
in favor in the end. Subsequent discussions with Malaysian
officials suggest that Finance's objections relate to the
inclusion of government procurement in the negotiations. We
also have encountered concerns at Bank Negara (the central
bank, responsible for regulation of the financial sector)
about too rapid liberalization of financial services.


9. (C) Private sector understanding of the FTA process is
shallow. The Malaysian government has not yet evolved the
consultative mechanisms that the USG employs to engage our
private sector. In the brief period since the rollout, the
only private comment has come from AIDS activists concerned
about the potential impact on pharmaceutical prices and drug
availability. However, there remains a small, but vocal,
contingent of officials and public opinion makers who
continue to view the world from a 1970's perspective of
north-south conflict. The anti-globalization advocates are
likely to take aim at the FTA negotiations at some point.


10. (C) The strongest opposition is likely to come from those
whose individual interests would be adversely impacted by
economic reform, most notably ethnic Malays and other
indigenous peoples who benefit from bumiputera (translated as
"sons of the soil") preferences. Such preferences pervade
almost every aspect of the economy - from reserving retail
space on the shelves of hypermarkets, to preserving local, in
particular Malay, control of domestic banks. They are
perceived by the political elite as necessary to maintain
racial harmony, or at least to retain control the Malay vote.
We also are likely to encounter resistance to addressing
some Islamic elements of Malaysia's economic policy, such as
halal rules for food products.


11. (C) Despite these potential sticking points, the
Malaysian government appears to be strongly committed to
successfully concluding the FTA. While there are limits to
the price they are willing to pay, Malaysian leaders see an
FTA as necessary to maintaining the country's economic
competitiveness within the Asia-Pacific region. They will be
looking to us to suggest compromises that will permit them to
pursue their domestic socio-economic goals, while still
meeting the requirements of a comprehensive FTA. Or as MITI
Minister Rafidah put it, to devise a prenuptial agreement
that is sufficiently flexible to allow both parties to
proceed to a happy marriage.
LAFLEUR