MALAYSIA: VIEWS ON ECONOMY TURN NEGATIVE

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E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV MY
SUBJECT: MALAYSIA: VIEWS ON ECONOMY TURN NEGATIVE


1. (SBU) Summary: The central bank of Malaysia released a
relatively upbeat report on third quarter economic
performance November 28, highlighting GDP growth of 4.7
percent despite deteriorating global economic conditions.
The central bank acknowledged that Malaysia, as a highly open
economy, would be impacted by external factors going forward.
Members of the U.S. business community have told the
Ambassador in several recent meetings that economic
conditions in Malaysia have worsened considerably since the
beginning of the fourth quarter and they are concerned that
the government,s pronouncements about the economy would play
poorly with the public when the real depth of the problems
Malaysia faces become clear. Export orders, which weakened
significantly in the third quarter, have fallen dramatically,
according to U.S. business executives, and demand for
products in the domestic market were falling along with
investment in core areas of the economy like energy and
manufacturing. The cental bank Governor told US bankers in
mid-November the government was aware of this sharp downturn
and was prepared to act as necessary to support economic
growth. The central bank lowered the benchmark interest rate
on November 24, and a central bank official told Econcouns
December 2 it had lowered its in-house forecast for GDP
growth in 2009 to 2.5 percent and its real concern was that
the policy tools available to the government could only
partially offset the impact of falling external demand on the
economy. End Summary.


2. (SBU) Comment: The government of Malaysia faces two
problems: a sharp economic downturn and a longstanding need
to make difficult economic reforms required to improve the
economy's efficiency and competitiveness. The government has
used appropriate fiscal stimulus and monetary easing to
smooth out the shock that the financial crisis represents,
and Deputy PM Najib has said many of the right things about
the need for international cooperation to address the global
economic crisis, including rejecting protectionism. Still,
with the economy facing a significant slowdown, the
government of Malaysia will face hard political choices over
whether it will stick with the economic policy status quo or
dismantle its own trade and investment barriers that hinder
growth. These economic problems come in the midst of an
election cycle for the ruling UMNO party, and also come at a
time of increased opposition challenge, factors that
encourage Malaysian government leaders to be overly positive
in their public economic assessments and to seek short term
fixes over politically difficult reforms. Adjustments that
touch on race-based preferences will be a praticularly
sensitive area at this moment, as racial rhetoric between
UMNO and its Malay partners has intensified. End Comment.

Upbeat Assessment by Central Bank


3. (SBU) Bank Negara (BN),Malaysia,s central bank, gave a
relatively upbeat assessment to third quarter economic
figures released on November 28, highlighting a slowing but
reasonably resilient economy. GDP growth had slowed from 8.3
percent in Q2 to 4.7 percent in Q3, drawn lower by lower
fixed capital formation and FDI in the face of cautious
business sentiment. BN noted relatively strong Q3 export
numbers were supported by high prices, but chose not to point
out that with prices of key commodities falling and export
orders drying up; future prospects would be significantly
gloomier.

Gloomy U.S. Business Views


4. (SBU) In recent AmCham briefings with the Ambassador, U.S.
business leaders emphasized that economic conditions in
Malaysia had taken a decided turn for the worse during the
month of November and that the government,s &happy talk8
on the economy which focused on previous performance could
turn out to be counterproductive as the public became aware
of the difficulties ahead. Firms like 3M that have a
real-time read on shifts in domestic demand, said orders from

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local firms had fallen off a cliff since the end of October.
Dell also reported dramatic cuts in IT orders from local
customers. Other U.S. firms were even more pessimistic.
Intel and Linear Technologies representatives indicated that
export orders had dried up, that some customers could not
obtain trade financing and that most firms were looking at
ways to cut back operational costs, including extended leave
or layoffs for employees, to weather the downturn. Energy
firms like ExxonMobil and Murphy Oil said investment projects
were either being put on hold or cut back.
PriceWaterhouseCooper, which provides advice to a wide
selection of foreign firms, concurred with the assessment
that there is a pullback on business investment
across-the-board.


5. (SBU) Despite relaying these same concerns to government
leaders, the head of a major U.S. banking firm said key
players like the Second Finance Minister Yakcop just did not
seem to get the seriousness of the situation Malaysia faced.
According to this contact, Yakcop held a roundtable of
business leaders following the announcement of the fiscal
stimulus package to see what additional steps the government
could take to support economic growth and FDI flows, but when
the foreign firms provided concrete suggestions to stimulate
investment in the services sector, Yakcop responded with a
long-winded answer on the difficulty involved that left
little room for optimism.


6. (SBU) Another senior AmCham board member and long-time
resident/observer of the Malaysian economic and political
scene, told the Ambassador that this was yet another example
of the GOM demonstrating it was adept at snatching defeat
from the jaws of victory. The economic crisis provided an
opportunity to move on reforms, but partly due to a lack of
confidence and competence in government, leaders were failing
to move. While the political leadership transition was
contributing to the lack of action, he said that Malaysia,s
incremental approach to policy was ingrained and the
leadership was simply not open to the large scale reform
measures Malaysia needed to look ahead and reinvent itself to
maintain competitiveness. Malaysian leaders lacked the
courage and vision to take big reforms. In addition to the
financial crisis, Malaysia faced an energy crisis and a
fiscal crisis a few years down the road, but despite much
discussion, the government had yet to devise policies to deal
with these challenges. This observer added that this
inaction continued even though government leaders were aware
that Malaysia,s position as a key site for electronics
industry FDI was already mostly a thing of the past and that
several important U.S. firms that had been mainstays in
Malaysia had already pulled out. Speaking to this point, a
country manager of a major U.S. oil services company said his
firm would have done an expansion of its facility in Johor,
but found the government too difficult, slow and cumbersome,
and therefore redirected investment funds to Singapore.


7. (SBU) According to a senior U.S. banker, Bank Negara
Governor Zeti admitted the government,s public stance on the
economy was overly positive but she asserted that the
government was not unaware or in denial about the worsening
condition of the economy. She acknowledged that political
leaders should be less optimistic in their public comments
but she had no control over that. In general, Zeti said, the
government was trying to maintain a realistic framework by
announcing downward revisions in the GDP growth forecast
without becoming alarmist. Citi said the bankers told Zeti
the government was risking an unpleasant shock to the public
when it became clear that the economy was doing much worse
next year than the government is letting on. However, a
senior Bank Negara official told Econcouns December 2 that
the government felt strongly it had to manage carefully the
flow of negative information to prevent self-fulfilling
negative expectations or panics that could cause additional
damage to the economy. This official said Bank Negara,s
in-house estimates for GDP growth for 2009 already had been

KUALA LUMP 00001063 003 OF 003


revised downward to 2.5 percent, and that the government was
looking at all policy options, but fiscal and monetary tools,
while somewhat helpful, could not fend off a slowdown brought
on by declining global demand.

KEITH