Identifier
Created
Classification
Origin
07KUALALUMPUR1108
2007-07-05 05:07:00
UNCLASSIFIED
Embassy Kuala Lumpur
Cable title:
Malaysia's Economy Slows in Q1
how-toVZCZCXRO3285 RR RUEHCHI RUEHDT RUEHHM RUEHNH DE RUEHKL #1108/01 1860507 ZNR UUUUU ZZH R 050507Z JUL 07 FM AMEMBASSY KUALA LUMPUR TO RUEHC/SECSTATE WASHDC 9596 INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC RUCPDOC/USDOC WASHDC RUEHGV/USMISSION GENEVA 1491 RUCNASE/ASEAN MEMBER COLLECTIVE RUEHBY/AMEMBASSY CANBERRA 2358
UNCLAS SECTION 01 OF 03 KUALA LUMPUR 001108
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
CANBERRA FOR ECON - MATTHEWS
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN EINV MY
SUBJECT: Malaysia's Economy Slows in Q1
REF: KUALA LUMPUR
-------
Summary
-------
UNCLAS SECTION 01 OF 03 KUALA LUMPUR 001108
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
CANBERRA FOR ECON - MATTHEWS
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN EINV MY
SUBJECT: Malaysia's Economy Slows in Q1
REF: KUALA LUMPUR
--------------
Summary
--------------
1. (U) Malaysia's economic growth slowed to 5.3% in the first
quarter of 2007, down from an average of 5.9% in 2006. Services led
the way with 9.6% growth and construction continued to recover as
development funds from the Ninth Malaysia Plan (9MP) finally started
flowing in significant amounts. The agriculture and mining sectors
recorded puzzlingly weak results, in view of the strong world demand
for commodities. Government fiscal stimulus should generate
stronger growth as the year progresses, with continued
implementation of 9MP programs, and spending associated with
expected elections and Malaysia's 50th anniversary of independence.
Nevertheless, Finance Minister (II) Nor Yakcop expects the
government's deficit target of 3.4% of GDP. End summary.
--------------
Services Lead the Way
--------------
2. (U) Malaysia's GDP growth slowed in first quarter 2007 to 5.3%
from an average rate of 5.9% during 2006. Nevertheless, the first
quarter exceeded the expectations of many analysts who had forecast
4.7% growth.
3. (U) On the supply side, services led the way, expanding 9.6%
year-on-year in Q1, partly due to increased tourism under the
GOM-sponsored promotion campaign "Visit Malaysia Year 2007." Growth
in the finance, insurance, real estate and business services
sub-sector expanded a strong 17.6%. Manufacturing, the traditional
backbone of Malaysia's economy, grew a scant 1.7% year-on-year on
weak global demand for electrical and electronic products.
Agriculture also disappointed, growing 2% year-on-year on lower
output of crude palm oil and rubber. Mining shrank 1.1%
year-on-year because of lower crude oil production, which slipped
3.8% to 680,153 bpd in Q1 2007 from 707,294 bpd in Q1 2006. The
construction sector rose 4% as government projects commenced under
the Ninth Malaysia Plan. (Comment: The fact that both agriculture
and mining recorded such slow growth, despite high world prices for
palm oil, rubber and petroleum, is somewhat surprising.)
--------------
Domestic Demand Pulls the Train
--------------
4. (U) Domestic demand grew a steady 7.6% year-on-year in Q1 2007.
Private consumption rose a stronger 8.6% year-on-year. A stable
labor market and high commodity prices of palm oil and natural
rubber helped buoy consumer spending. The Malaysian Institute of
Economic Research's (MIER) Consumer Sentiments Index (CSI) rose 13.2
points to 124.1 points in the first quarter, its highest level since
Q3 2000. MIER's data indicates consumers have increased confidence
regarding employment and income prospects. Public consumption
increased 7.3%, primarily due to higher government spending for
salaries, supplies, and services. This is expected to increase
further with the implementation of recently announced civil service
pay raises ranging from 7.5% to 35.0%, and a doubling of the cost of
living allowance (COLA) for more than one million government
employees which takes effect July 1. The pay increase will cost the
government an additional RM 8 billion (US$ 2.35 billion) annually.
5. (U) Total investment expanded by 5.4% during the first quarter of
2007, down from 9.8% in the fourth quarter of 2006. The government
disbursed an estimated RM 5.3 billion (US$ 1.53 billion) of
development spending in Q1. Although the development expenditure
was 2.5 times that of the last corresponding quarter, the rate of
disbursement is expected to speed up in the second-half of the year
as 9MP projects heat up. MIER's Business Conditions Index (BCI)
eased by 1.7 points to 105.5 in the first quarter, but still stayed
above the 100-point (business neutral) benchmark. According to the
MIER survey, manufacturers were slowing production in reaction to
disappointing domestic and external orders. However, manufacturers'
outlook for the near-term remains positive and increased output is
planned for next quarter.
6. (U) Exports slowed significantly, growing only 1.9% year-on-year
KUALA LUMP 00001108 002 OF 003
in Q1, due to weak demand for electronic and electrical products.
Imports remained moderate, expanding 3.5% over the first quarter
supported by higher imports of intermediate and consumer goods.
--------------
Lower Fiscal Deficit, For Now
--------------
7. (U) The federal government recorded a fiscal deficit of RM 2.6
billion (US$ 754 million),or 1.8% of GDP in Q1 2007, compared to a
fiscal surplus of RM 4.9 billion (US$ 1.3 billion),or 3.6% of GDP
in Q1 2006. In 2006, the overall fiscal deficit was 3.5% of GDP.
Total government spending rose 38.7% year-on-year in the first
quarter of 2007. Development spending rose 148% year-on-year with
the starting of the 9MP projects. Revenue collections remained flat
at RM 24.2 billion (US$ 7.2 billion) in the quarter. According to
press reports, Finance Minister (II) Nor Mohamed Yakcop expressed
confidence that the government would meet its fiscal deficit target
of 3.4% of GDP in 2007.
--------------
Reserves Escalate as External Debt Declines
--------------
8. (U) Malaysia's foreign exchange reserves rose to US$ 88.6 billion
as of the end of March 2007, from US$ 82.5 billion at the end of
December 2006. Reserves rose further to US$ 98.4 billion by
end-May, sufficient to finance 9 months of retained imports. In May
alone, reserves rose by US$ 6.8 billion, accounting for 43% of the
net increase year to date. Large foreign inflows prompted by the
inclusion of Malaysia in a widely followed global investment index
contributed significantly to the surge. Net inflows of portfolio
investment rose from RM 5.4 billion (US$ 1.6 billion) in Q4 2006 to
RM 26.9 billion (US$ 7.8 billion) in Q1 2007. Two-thirds of the
inflows were invested in shares and corporate securities, 21.3% in
monetary instruments and 7% in Malaysian government securities.
9. (U) Malaysia's external debt declined (in ringgit terms) to RM
178 billion (US$ 51.0 billion) at the end of March from RM 183.1
billion (US$ 51.4 billion) at the end of 2006 as the ringgit
appreciated against major currencies, particularly the dollar. The
volume of medium- and long-term external loans fell. Public sector
debt declined as the federal government borrowed less and repaid
external debt. Private sector debt remained unchanged. Both public
and private short-term debt declined 6.9% to US$ 38.9 billion (US$
11.3 billion).
--------------
Key Interest Rate Unchanged
--------------
10. (U) Malaysia has kept its key benchmark interest rate unchanged
at 3.50% since April 27, 2006. Slower GDP growth in Q1 had raised
expectations that Bank Negara might consider cutting rates to
stimulate the economy. However, the central bank signaled it was
unlikely to reduce rates, stating that they are at the appropriate
level to support domestic demand.
11. (U) The ringgit appreciated against the major currencies during
the first quarter. The ringgit reached its 10-year high of RM 3.388
to the dollar on May 28, but weakened to RM 3.4835 on June 27 as the
dollar regained its strength.
--------------
Inflationary Pressures Ease
--------------
12. (U) As measured by the Consumer Price Index (CPI),inflation was
moderate at 2.6% year-on-year in Q1. In March, Malaysia's inflation
eased to its lowest level (1.5% year-on-year) since August 2004.
For January through May, the CPI rose 2.2% year-on-year as compared
to 3.6% during the same period in 2006. Bank Negara forecasts that
inflation will average around 2.0% to 2.5% in 2007. (Comment:
Malaysia's CPI statistics are misleading because they are based
largely on fixed-price items, including highly-regulated food
products.)
-------------- --
Signs Point to Faster Growth in the Second Half
KUALA LUMP 00001108 003 OF 003
-------------- --
13. (U) Comment: With the government opening the spending taps,
economic activity undoubtedly will strengthen over the 5.3% recorded
in the first quarter. Such stimulus is not, however, a good
foundation for diversified long-term term growth. Prime Minister
Abdullah has said he wants the private sector to drive the economy,
but Malaysia remains highly dependent on government spending to
sustain its development. The poor results in the agriculture and
mining sectors are puzzling given the strong worldwide demand for
these commodities. They bear watching to see if this is a one time
event, or if capacity constraints may be preventing Malaysia from
taking full advantage of the favorable conditions for its basic
commodity exports.
LAFLEUR
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
CANBERRA FOR ECON - MATTHEWS
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN EINV MY
SUBJECT: Malaysia's Economy Slows in Q1
REF: KUALA LUMPUR
--------------
Summary
--------------
1. (U) Malaysia's economic growth slowed to 5.3% in the first
quarter of 2007, down from an average of 5.9% in 2006. Services led
the way with 9.6% growth and construction continued to recover as
development funds from the Ninth Malaysia Plan (9MP) finally started
flowing in significant amounts. The agriculture and mining sectors
recorded puzzlingly weak results, in view of the strong world demand
for commodities. Government fiscal stimulus should generate
stronger growth as the year progresses, with continued
implementation of 9MP programs, and spending associated with
expected elections and Malaysia's 50th anniversary of independence.
Nevertheless, Finance Minister (II) Nor Yakcop expects the
government's deficit target of 3.4% of GDP. End summary.
--------------
Services Lead the Way
--------------
2. (U) Malaysia's GDP growth slowed in first quarter 2007 to 5.3%
from an average rate of 5.9% during 2006. Nevertheless, the first
quarter exceeded the expectations of many analysts who had forecast
4.7% growth.
3. (U) On the supply side, services led the way, expanding 9.6%
year-on-year in Q1, partly due to increased tourism under the
GOM-sponsored promotion campaign "Visit Malaysia Year 2007." Growth
in the finance, insurance, real estate and business services
sub-sector expanded a strong 17.6%. Manufacturing, the traditional
backbone of Malaysia's economy, grew a scant 1.7% year-on-year on
weak global demand for electrical and electronic products.
Agriculture also disappointed, growing 2% year-on-year on lower
output of crude palm oil and rubber. Mining shrank 1.1%
year-on-year because of lower crude oil production, which slipped
3.8% to 680,153 bpd in Q1 2007 from 707,294 bpd in Q1 2006. The
construction sector rose 4% as government projects commenced under
the Ninth Malaysia Plan. (Comment: The fact that both agriculture
and mining recorded such slow growth, despite high world prices for
palm oil, rubber and petroleum, is somewhat surprising.)
--------------
Domestic Demand Pulls the Train
--------------
4. (U) Domestic demand grew a steady 7.6% year-on-year in Q1 2007.
Private consumption rose a stronger 8.6% year-on-year. A stable
labor market and high commodity prices of palm oil and natural
rubber helped buoy consumer spending. The Malaysian Institute of
Economic Research's (MIER) Consumer Sentiments Index (CSI) rose 13.2
points to 124.1 points in the first quarter, its highest level since
Q3 2000. MIER's data indicates consumers have increased confidence
regarding employment and income prospects. Public consumption
increased 7.3%, primarily due to higher government spending for
salaries, supplies, and services. This is expected to increase
further with the implementation of recently announced civil service
pay raises ranging from 7.5% to 35.0%, and a doubling of the cost of
living allowance (COLA) for more than one million government
employees which takes effect July 1. The pay increase will cost the
government an additional RM 8 billion (US$ 2.35 billion) annually.
5. (U) Total investment expanded by 5.4% during the first quarter of
2007, down from 9.8% in the fourth quarter of 2006. The government
disbursed an estimated RM 5.3 billion (US$ 1.53 billion) of
development spending in Q1. Although the development expenditure
was 2.5 times that of the last corresponding quarter, the rate of
disbursement is expected to speed up in the second-half of the year
as 9MP projects heat up. MIER's Business Conditions Index (BCI)
eased by 1.7 points to 105.5 in the first quarter, but still stayed
above the 100-point (business neutral) benchmark. According to the
MIER survey, manufacturers were slowing production in reaction to
disappointing domestic and external orders. However, manufacturers'
outlook for the near-term remains positive and increased output is
planned for next quarter.
6. (U) Exports slowed significantly, growing only 1.9% year-on-year
KUALA LUMP 00001108 002 OF 003
in Q1, due to weak demand for electronic and electrical products.
Imports remained moderate, expanding 3.5% over the first quarter
supported by higher imports of intermediate and consumer goods.
--------------
Lower Fiscal Deficit, For Now
--------------
7. (U) The federal government recorded a fiscal deficit of RM 2.6
billion (US$ 754 million),or 1.8% of GDP in Q1 2007, compared to a
fiscal surplus of RM 4.9 billion (US$ 1.3 billion),or 3.6% of GDP
in Q1 2006. In 2006, the overall fiscal deficit was 3.5% of GDP.
Total government spending rose 38.7% year-on-year in the first
quarter of 2007. Development spending rose 148% year-on-year with
the starting of the 9MP projects. Revenue collections remained flat
at RM 24.2 billion (US$ 7.2 billion) in the quarter. According to
press reports, Finance Minister (II) Nor Mohamed Yakcop expressed
confidence that the government would meet its fiscal deficit target
of 3.4% of GDP in 2007.
--------------
Reserves Escalate as External Debt Declines
--------------
8. (U) Malaysia's foreign exchange reserves rose to US$ 88.6 billion
as of the end of March 2007, from US$ 82.5 billion at the end of
December 2006. Reserves rose further to US$ 98.4 billion by
end-May, sufficient to finance 9 months of retained imports. In May
alone, reserves rose by US$ 6.8 billion, accounting for 43% of the
net increase year to date. Large foreign inflows prompted by the
inclusion of Malaysia in a widely followed global investment index
contributed significantly to the surge. Net inflows of portfolio
investment rose from RM 5.4 billion (US$ 1.6 billion) in Q4 2006 to
RM 26.9 billion (US$ 7.8 billion) in Q1 2007. Two-thirds of the
inflows were invested in shares and corporate securities, 21.3% in
monetary instruments and 7% in Malaysian government securities.
9. (U) Malaysia's external debt declined (in ringgit terms) to RM
178 billion (US$ 51.0 billion) at the end of March from RM 183.1
billion (US$ 51.4 billion) at the end of 2006 as the ringgit
appreciated against major currencies, particularly the dollar. The
volume of medium- and long-term external loans fell. Public sector
debt declined as the federal government borrowed less and repaid
external debt. Private sector debt remained unchanged. Both public
and private short-term debt declined 6.9% to US$ 38.9 billion (US$
11.3 billion).
--------------
Key Interest Rate Unchanged
--------------
10. (U) Malaysia has kept its key benchmark interest rate unchanged
at 3.50% since April 27, 2006. Slower GDP growth in Q1 had raised
expectations that Bank Negara might consider cutting rates to
stimulate the economy. However, the central bank signaled it was
unlikely to reduce rates, stating that they are at the appropriate
level to support domestic demand.
11. (U) The ringgit appreciated against the major currencies during
the first quarter. The ringgit reached its 10-year high of RM 3.388
to the dollar on May 28, but weakened to RM 3.4835 on June 27 as the
dollar regained its strength.
--------------
Inflationary Pressures Ease
--------------
12. (U) As measured by the Consumer Price Index (CPI),inflation was
moderate at 2.6% year-on-year in Q1. In March, Malaysia's inflation
eased to its lowest level (1.5% year-on-year) since August 2004.
For January through May, the CPI rose 2.2% year-on-year as compared
to 3.6% during the same period in 2006. Bank Negara forecasts that
inflation will average around 2.0% to 2.5% in 2007. (Comment:
Malaysia's CPI statistics are misleading because they are based
largely on fixed-price items, including highly-regulated food
products.)
-------------- --
Signs Point to Faster Growth in the Second Half
KUALA LUMP 00001108 003 OF 003
-------------- --
13. (U) Comment: With the government opening the spending taps,
economic activity undoubtedly will strengthen over the 5.3% recorded
in the first quarter. Such stimulus is not, however, a good
foundation for diversified long-term term growth. Prime Minister
Abdullah has said he wants the private sector to drive the economy,
but Malaysia remains highly dependent on government spending to
sustain its development. The poor results in the agriculture and
mining sectors are puzzling given the strong worldwide demand for
these commodities. They bear watching to see if this is a one time
event, or if capacity constraints may be preventing Malaysia from
taking full advantage of the favorable conditions for its basic
commodity exports.
LAFLEUR