Identifier
Created
Classification
Origin
08KUALALUMPUR1080
2008-12-14 23:46:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kuala Lumpur
Cable title:  

MALAYSIAN GROWTH DECLINING DESPITE IMPLEMENTATION OF

Tags:  EFIN EINV ECON ETRD PGOV MY 
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DE RUEHKL #1080/01 3492346
ZNR UUUUU ZZH
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FM AMEMBASSY KUALA LUMPUR
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INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
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UNCLAS SECTION 01 OF 04 KUALA LUMPUR 001080 

STATE PASS USTR - WEISEL AND BELL
STATE PASS FEDERAL RESERVE AND EXIMBANK
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN
SINGAPORE PASS TO SBAKER
USDOC FOR 4430/MAC/EAP/M.HOGGE
TREASURY FOR OASIA AND IRS
GENEVA FOR USTR
SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN EINV ECON ETRD PGOV MY
SUBJECT: MALAYSIAN GROWTH DECLINING DESPITE IMPLEMENTATION OF
SUPPORTIVE POLICY MEASURES

UNCLAS SECTION 01 OF 04 KUALA LUMPUR 001080

STATE PASS USTR - WEISEL AND BELL
STATE PASS FEDERAL RESERVE AND EXIMBANK
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN
SINGAPORE PASS TO SBAKER
USDOC FOR 4430/MAC/EAP/M.HOGGE
TREASURY FOR OASIA AND IRS
GENEVA FOR USTR
SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN EINV ECON ETRD PGOV MY
SUBJECT: MALAYSIAN GROWTH DECLINING DESPITE IMPLEMENTATION OF
SUPPORTIVE POLICY MEASURES


1. (SBU) SUMMARY: Malaysian government and private sector analysts
expressed pessimism about the performance of the Malaysian economy
in 2009 during meetings with visiting Treasury Attache Susan Baker
and Econcouns. Although banks are well capitalized, a sharp decline
in demand for Malaysia's manufactured exports and a sharper decline
in the price of its export commodities are taking a toll on growth.
Moreover, the government's RM 7 billion (USD 2 billion) fiscal
stimulus package is viewed as unlikely to reverse the downward
trend. With 40 percent of federal revenues dependent on Petronas,
the national oil company, low oil prices coupled with declining
production could force Malaysia's government to address its
ballooning fiscal deficit in 2010. Ministry of Finance officials
report that a goods and services tax (value-added tax) is "ready" to
address this revenue shortfall; however, the political will to
implement it is lacking. One private banker predicted that Bank
Negara would cut interest rates by another 50 basis points during
the first quarter of 2009 to cushion the economic downturn, but
officials at Bank Negara warned that there were limits to what
monetary and fiscal stimulus could do to address Malaysia's longer
term structural problems. Bank Negara dismissed the idea that it
used currency policy inappropriately. End summary.


2. (SBU) COMMENT: Malaysia is reaching the limit of what its own
policies can do to support the economy in the short run: in
monetary policy, rates are already low in absolute terms and
negative in real terms, and in fiscal policy, much more spending
risks a downgrade of their sovereign credit ratings. More and more,
the GoM must be squaring up to reality that they need major
structural reforms in several areas to end the system of racial
preferences, strengthen the tax base, improve the education system
and spur the private (rather than public) sector investment that

would improve the economy's long term growth potential. End
comment.

PROSPECTS FOR THE MALAYSIAN ECONOMY


3. (SBU) Bank Negara's Director of Monetary Assessment and Strategy
Dr. Sukhdave Singh (protect) told Baker and Econcouns he was
privately not upbeat about the prospects for the Malaysian economy:
exports were down, commodity prices were way down, and manufacturing
companies were looking at layoffs, he said. He hoped employers
would cut wages or give time off first because consumers would be
more confident and ready to spend if they remained employed.
(Comment: Considering Malaysia's relatively high consumer
indebtedness levels, a sharp rise in unemployment could have serious
negative ramifications for many banks. End Comment)


4. (SBU) Sukhdave lamented that Malaysia's capacity to deal with the
global crisis was limited. While Malaysian banks were well
capitalized and in good shape, interest rates had been low for some
time, and now there was very little room to lower them further in an
effort to stimulate the economy. He hoped the RM 7 billion fiscal
stimulus plan would halt the downward spiral but said it would take
time before corporate balance sheets recovered. Meanwhile,
consumers were over their heads in mortgages, manufacturing was
experiencing negative growth, and demand for loans from small &
medium-sized enterprises was down. Auto sales were holding up but
it was only a matter of time before they would be hit as well. He
predicted that 2009 would be a bad year for Malaysia and across the
region. Analysts were no longer pointing to a recovery in the
second half of 2009; rather, they were looking to 2010 -- even to
the second half of 2010.


5. (SBU) Malaysia would need to look at the global competitiveness
of its economy, focusing on longer-term solutions, Sukhdave said.
Savings rates remained high because Malaysia had an insufficient
social safety net and because many Malaysians had lost faith in the
country's educational system. People saved for years to send their
children to study overseas. Transportation was another issue that
needed to be addressed. As a result, people spent a great deal to
live closer to work; if the transportation infrastructure were
better, this would not be necessary. Malaysia needed to liberalize
its economy and provide the right incentives to encourage
investment. Sukhdave hoped the pressure from the economic downturn
would help politicians to realize the importance of enacting
longer-term structural economic reforms.

KUALA LUMP 00001080 002 OF 004




6. (SBU) He said the current downward pressure on the ringgit was a
manifestation of a widespread "flight to safety" which would unwind
as soon as the global economy began to show signs of recovery.
Malaysia, he added, was not trying to depreciate its way out of the
economic crisis. He said the ringgit was widely expected to
appreciate and had experienced huge portfolio flows during the first
quarter of 2008. Since then, the trend had reversed.


7. (SBU) Sukhdave asserted that, as an open trading nation, Malaysia
needed to maintain a high level of foreign exchange reserves in its
current account as a safety buffer. He divided the current account
into two parts: a more reliable "core" amount derived from
trade-based transactions and a "short-term" amount derived from
portfolio flows, which could not be counted as part of a safety
buffer because speculators were likely to pull these types of funds
out of the country at the first sign of a downturn. Bank Negara
tracked where transactions came from and where they were going -
whether for foreign direct investment, for the stock market, or
elsewhere, he said. Bank Negara intervened to mitigate extreme
volatility related to short-term flows, which sometimes amounted to
billions of ringgit in a month only to reverse the following month.
Sukhdave insisted that Bank Negara's interventions touched upon
neither the "core" current account funds nor the long-term
fundamentals of the Malaysian economy. Within Bank Negara, they did
not discuss exchange rates as a tool to increase the competitiveness
of Malayia's exports, noting that in the current downturn in global
demand, such efforts would, in any case, be useless.

MALAYSIA'S STIMULUS PLAN


8. (SBU) Like Sukhdave, Datuk Puan Latifah, Deputy Secretary General
for Policy at the Ministry of Finance, acknowledged to Baker and
Econcouns that reduced exports would deal a painful blow to the
Malaysian economy going forward, but saw that as the local economy's
"only problem."


9. (SBU) Latifah expressed confidence in the positive effects of
Malaysia's economic stimulus package, which her office had drafted.
The package would focus on infrastructure, training, and boosting
domestic demand. The plan includes RM 1.5 billion (USD 428 million)
to establish an investment fund to attract private investment, RM
1.2 billion (USD 343 million) for low and medium cost housing, and
money for public transportation, roads, schools, hospitals, police
stations and quarters, broadband, skills training, business premises
for SMEs, education, and maintenance projects.


10. (SBU) Policy initiatives in the fiscal stimulus plan include a
promise to "re-prioritize" government projects, develop
government-owned land (much of which has been occupied by low-income
"squatters" since at least the 1950s),allow employees to reduce
mandatory retirement savings, and order shopping malls and
hypermarkets to extend their operating hours. Import duties on
cement have been abolished; duties on iron, steel and other
construction materials have been reduced.

OIL REVENUE DECLINING BUT VAT TAX READY TO GO


11. (SBU) Latifah acknowledged that the GOM received approximately
40 percent of its federal revenue from Petronas, the national oil
company, and that Malaysia was projected to become a net importer of
oil over the next several years. In addition, the 2009 budget was
developed based on an assumed average oil price of $125 per barrel
for 2008. (Note: Petronas' 2008 profits determine their 2009
contribution to federal coffers. End note.) Therefore, the 2009
fiscal deficit would be larger than projected due to the unforeseen
plummet from a high oil price of $147 to less than $47 per barrel.
The average price of oil from January through November 2008 remained
above $100, she said, so fiscal impacts in 2009 would be limited.
However, if oil prices remain low in 2009, the GOM would face a
significant reduction in its 2010 revenue.


12. (SBU) A Goods and Services Tax (GST, a value-added tax) was
ready to go, Latifah explained, to deal with this impending problem.
The plans were complete, simulations had been run - only the
political will to implement it was lacking. She pointed out that

KUALA LUMP 00001080 003 OF 004


the middle of a global economic crisis was not an ideal time to
implement a new tax, but she did not rule out the possibility of
rolling it out in 2010.

BANKERS' OUTLOOK GLUM


13. (SBU) Suhaimi Ilas, Vice President & Chief Economist for Equity
Markets at Aseambankers Malaysia Berhad, said Malaysia was "feeling
the heat" of the global economic slowdown. His forecast for 2009
growth is 2.5 percent, compared to the government official forecast
of 3.5 percent. Manufacturers were shortening working hours and
mandating unpaid leave over Christmas and in some cases until the
second week of January. Chinese New Year holidays would further
reduce January-February manufacturing figures. The Federation of
Malaysian Manufacturers was warning of a contraction in 2009,
particularly in the electrical and electronics industry.


14. (SBU) Suhaimi said Bank Negara was likely to cut interest rates
by another 50 basis points in the first quarter, but that the RM 7
billion stimulus plan (worth an estimate 1 percent of GDP) was
insufficient to make much of an impact on the economy as a whole. He
expressed concern about the lack of transparency surrounding the
large share of the stimulus program being channeled into the
government-owned asset manager Value Cap. Finally, he noted that
none of the fiscal plans so far had done anything to address
Malaysia's underlying problem of a low share of private investment.
He did not expect that a GST would be implemented before 2011. Even
if the economy revived in 2010, the GOM would need to inform
businesses in advance of implementing a new tax.


15. (SBU) He predicted loan growth to slow to low single digit
growth 2009, with banks cutting more on consumer lending. He had
not seen a shortage of trade financing or other business lending.
He said low-income Malaysians tended to be highly indebted, often
qualifying for loans based on overtime pay which was drying up.
Suhaimi noted that Malaysia's current account balance would fall,
due to a sharp fall in exports and weaker remittances from overseas
workers (for example, from financial sector workers in Singapore.)
However, he expected imports would drop dramatically as well, since
70-75 percent of Malaysian imports were intermediate goods
reprocessed into exports. He did not think that the recent
weakening in the ringgit was due to current account performance, but
rather reflected the fact that real (inflation-adjusted) interest
rates were sharply negative.


16. (SBU) In a subsequent meeting with Baker and Econoff, Stephen
Hagger (protect),Managing Director for Asian Equities at Credit
Suisse, agreed that the outlook for Malaysia was grim. He expressed
faint hope but little expectation that the current economic
pressures would lead to economic reforms. He said Deputy Prime
Minister Najib had asked him in a recent meeting what Malaysia's top
economic priorities should be; Hagger had responded that the racial
preference policies under the New Economic Policy (NEP) needed to be
sunsetted and Malaysia needed to improve its educational system. He
said that there was a keen understanding among policymakers of the
need to reform; however, vested interests made reform difficult.


17. (SBU) Ambank corporate finance officials also noted that
financial markets essentially had shut down. There were no new IPOs
in the pipeline. Since the government attempted to impose a
windfall profit tax on electricity companies (reftel),bond
issuances, including Islamic bond issuances, had disappeared.
Interest in private equity deals also had dried up. Only a few
companies, such as electricity producer YTL and resorts company
Genting, were expanding investments and doing deals, and these were
generally funded from resources already on hand at those companies.


GOVERNMENT MUST LOOSEN ITS GRIP, SAYS OFFICIAL


18. (SBU) Dr. Noor Azlan Ghazali (protect),Director of the
Malaysian Development Institute within the Economic Planning Unit,
which is part of the Prime Minister's Department, told Baker and
Econoff that if Malaysia wanted to become a developed nation by 2020
it would have to "loosen the grip of government control." The GOM
had a "long experience of controlling" the economy, Noor said, and

KUALA LUMP 00001080 004 OF 004


liberalization would have to come in stages as market
infrastructures were developed. Noor highlighted Malaysia's lack of
price flexibility as evidence that the market was not working
properly. Noor felt strongly that Malaysia needed an anti-trust law
to promote competition, which would aid in price flexibility as
well.


19. (U) This cable has been cleared by Susan Baker, Treasury
Attache, Singapore.