MALAYSIA FEELING EFFECT OF FINANCIAL CRISIS,

C O N F I D E N T I A L KUALA LUMPUR 000897

SIPDIS

TREASURY FOR OASIA AND IRES, STATE FOR USTR - WEISEL AND
BELL, STATE FOR FEDERAL RESERVE AND EXIMBANK, STATE FOR
FEDERAL RESERVE SAN FRANCISCO TCURRAN, USDOC FOR
4430/MAC/EAP/HOGGE

E.O. 12958: DECL: 10/11/2013
TAGS: ECON EFIN EINV PGOV MY
SUBJECT: MALAYSIA FEELING EFFECT OF FINANCIAL CRISIS,
EXPECTS TOUGH YEAR IN 2009

REF: A. A) KL 814

B. B) KL 822

Classified By: Economic Counselor Matt Matthews for reasons 1.4 (b) and
(d).



1. (SUB) Malaysia started the financial crisis with
relatively good macroeconomic fundamentals and a strong
external position for handling shocks to the system. GDP
growth was strong, reserves were at USD 125 billion, exports
were growing fast and Malaysia enjoyed a substantial balance
of payments surplus. However, after the strong first half
this year, Malaysia,s financial markets and the real economy
have begun to show signs of stress. Growth in industrial
production has slowed markedly to just 0.9 percent in August
yoy, consumer confidence has dropped through the floor and
key export sectors like electronics have weakened
substantially. As of September 30, Malaysian forex reserves
have dropped 12.8 percent to USD 109 billion as foreign funds
abandon the stock and bond markets. The Bursa Malaysia stock
market was down 8 percent over the past week and down 36.5
percent since the beginning of the year. CIMB, one of
Malaysia,s leading banks, predicts GDP growth will slow to 3
percent in 2009 as the secondary effects of the financial
crisis and ongoing global slowdown play out. So despite the
fact that Malaysia maintains a strong trade surplus with
exports exceeding imports by USD 27 billion January through
August and a forex reserve cushion equaling a substantial 9
months of imports and 4.1 times Malaysia,s external debt
position, the mood in Malaysia is one of caution and
increasing worry.


2. (C) Central Bank Governor Zeti recently told EconCouns
that she was fully supportive of efforts of the Federal
Reserve and the Treasury to stabilize the U.S. financial
system. Zeti commented that the moves were fully justified
given the depth of the problem and her only criticism was
that the USG could have moved with a broader package of
measures sooner. As for the impact of the US financial
crisis on Malaysia, Zeti said that unlike 1997, Malaysia had
a better capitalized, more efficient and more tightly
regulated banking sector which was relatively well insulated
from first round effects. To date, Malaysia,s exposure has
been very limited, according to Zeti, but central bank
remained on high alert as more international financial firms
experienced problems to ensure that local banks were not hit
by counterparty risks. Zeti noted that she had been harshly
criticized for intervening to support Malaysian banking
institutions during the Asian Financial Crisis, but she felt
vindicated now and made it clear that Bank Negara would be
ready to support Malaysian banks if necessary. Zeti added
that she also had been criticized at the summer BIS meetings
for refusing to raise interest rates but she said her bet
that the financial crisis would create substantial negative
secondary effects on Malaysia,s real economy through slowing
exports and higher costs for capital justified her insistence
on maintaining an accommodative monetary stance.


3. (C) Goh Ching Yin, the Executive Director of the
Securities Commission,s Strategy and Development Division
told Econcouns that the Commission was also on alert.
Foreign portfolio funds had been withdrawn from Malaysia,s
stock market over the past six months and the market had
declined over 30 percent since the beginning of the year.
The declines so far were coming in manageable increments, Goh
said, but the Commission was prepared to implement its
circuit breaker trading procedures if the market declined
over 10 percent in a day. Like the central bank, the
Securities Commission was particularly on the lookout for
listed firms being hit by unexpected counterparty risks. But
even if specific Malaysian firms do not come under attack, in
Goh,s view, there was no way Malaysia could escape the
generally negative trends the financial crisis has created
throughout Asia. He expected continued weakness in the stock
market because foreign funds would continue to exit and
because Malaysian corporates would experience weaker demand
for their products, higher costs of capital, tighter margins
and declining profitability*thus keeping local punters on
the sidelines.


KEITH