Inflation and Auto Sales Rise; GOM Fuel Subsidies

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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%

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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