Inflation and Auto Sales Rise; GOM Fuel Subsidies

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 001491 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 MY SUBJECT: Inflation and Auto Sales Rise; GOM Fuel Subsidies Unsustainable: Malaysia Economic Update for September 2007 ¶1. Summary: - Inflation in Malaysia increased in August, although the GOM continued to hold down prices on certain basic necessities through subsidies and price controls. - Soaring global oil prices may soon force the GOM to reduce subsidies for gasoline and natural gas, which have cost the GOM billions of dollars this year. - Following six months of declines, auto sales revived somewhat in August as talks between cash-strapped Proton and Volkswagen continue. End Summary. Inflation Up in August -------------- ¶2. Malaysia's consumer price index (CPI),a measure of the country's inflation rate, increased 1.9% to 105.7 in August year-on-year, after rising 1.6% in July. This was the highest increase since February with food prices, which accounted for nearly one third of the consumer basket, rising the fastest. Food and non-alcoholic beverages increased 2.9% in August compared with 2.3% in July. From January to August the CPI rose 2% from the same period a year ago. For the whole of 2007 the GOM expects inflation to be contained at 2%. [Comment: The GOM is fairly confident it will be able to keep inflation at bay because about 20% of items in the CPI basket are price-controlled. Deputy Prime Minister Najib Tun Razak has stated openly that the GOM will continue to take steps to protect consumers from escalating prices by subsidizing and/or fixing the prices of certain commodities and daily necessities. End comment]. Subsidies Keep Gas Prices Low -------------- ¶3. The GOM has kept its promise to maintain price controls of domestic pump gasoline despite rising crude oil prices, which have forced the GOM to pay out about RM 14 billion (USD 4 billion) in gasoline subsidies so far this year. Meanwhile national oil company Petroliam Nasional Bhd (Petronas) is hoping the GOM will allow it to raise the prices it charges consumers and Malaysia's national power company, Tenaga Nasional Berhad, for natural gas (Malaysia relies heavily on natural gas powered generators to produce electricity). Subsidies for natural gas have cost Petronas RM 15 billion (USD 4.3 billion) as of September this year. ¶4. Petronas President and CEO Mohd Hassan Merican warned that fuel subsidies are not sustainable over the long term because of skyrocketing global oil prices. The GOM has agreed to look into the matter but stated it must first study the impact of reducing subsidies on consumers. Merican said Petronas is currently allowed to charge consumers RM 6.40 (USD 1.83) per mmBtu for domestic usage although the market price is about RM 40 (USD 11.4) per mmBtu. [Comment: Given the substantial price difference between subsidized and non-subsidized gasoline and natural gas, there is a general consensus among analysts here that the GOM will need to begin reducing subsidies, and raising prices, on these products early next year, probably following Malaysia's next federal election. End comment]. Consumers Feeling the Pinch of Rising Prices -------------- ¶5. Except for civil servants (who received a hefty salary hike and cost of living increase on July 1),wage earners in Malaysia are starting to feel the pinch of price increases. Prices of milk and coffee rose between 10 to 30% in April and are likely to increase again in November. The GOM allowed the price of flour to increase by 18.7% to RM 1.90 (USD 0.54) per kilo on September 15, prompting bakers and noodle makers to raise the prices of bread, biscuits and noodles by between 20 to 25% as of October 1. The Malaysian Sauces Manufacturers also raised the prices of various sauce products by 10% on September 2. Bernas, the GOM authorized rice agent, had announced plans to increase prices of local and imported rice by between 1.8 to 7.7% in July but was instructed to abort the decision until GOM approval is obtained. ¶6. More price increases are in the pipeline. The Kuala Lumpur and Selangor Taxi operators intend to request a fare increase of 50% KUALA LUMP 00001491 002 OF 002 from RM 2 to RM 3 (USD 0.57 to USD 0.86) for the flag fall rate and a ten Malaysian cent (USD 0.03) charge for every 100 meters instead of the current 150 meters. Works Minister Samy Vellu said Malaysians can expect a 10% increase in toll rates, with eight toll road concessionaires raising their charges from Jan 1, 2008. However, he said the Works Ministry is working on several proposals to spread part of the cost to the concessionaires and the GOM. The increase in toll rates is likely to inflate the prices of all goods distributed via Malaysia's extensive network of toll roads. New Car Sales Up -------------- ¶7. New car sales for August grew 6 percent to 47,585 units over 44,926 units in the previous month, after declining in the first six months of this year. Overall car sales in Malaysia fell 12 percent to 220,739 units in the first half of 2007 from 251,340 units in the first half of 2006. According to the Malaysian Automotive Association (MAA),the improvement in August sales was due to the launch of several new models by Malaysia's two national car manufacturers, Perodua and Proton, and to the hefty mid-summer salary increase for civil servants. ¶8. A local automotive analyst told EconFSN he expected auto sales to continue their recovery for the rest of this year as more new models are launched. He added that he believed the used car market in Malaysia will also stabilize toward the end of the year. In terms of market share, Perodua and Proton accounted for 55.5 percent of the domestic market but foreign makes are also selling well, led by Japanese (principally Toyota, Nissan and Honda) and Korean makes. GOM Props Up to National Car Companies -------------- ¶9. To lift the distressed auto market, the GOM has allocated RM 750 million (USD 221 million) to subsidize the two national car companies' manufacturing costs. Recently, Proton's share of the domestic car market dropped to around 21.3 percent compared to 34.2% for Perodua, which specializes in compact cars. With a steady decline in its share of the domestic market, Proton has announced plans to export about 100,000 cars within the next few years, and has signed joint ventures with dealerships in China and Thailand to sell its new "Persona" sedan in those markets. Proton is also talking with several dealerships in India. Proton (Still) Desperately Seeking a Strategic Partner -------------- -------------- ¶10. Meanwhile Prime Minister Abdullah Badawi said talks between Proton and German automaker Volkswagen (VW) on a possible tie-up were continuing. Although they appeared to have stalled earlier this year, Abdullah said the talks were revived when he and officials from Khazanah, the GOM's investment arm, met with VW officials in June in New Jersey, and more recently in Bangkok. Abdullah said talks with France's PSA and US-based General Motors have been called off. VW Chief Executive Maring Winterkorn is expected to visit Malaysia in the next few weeks with some analysts speculating that a deal could be concluded during his visit. KEITH