MALAYSIA UNVEILS USD 16 BILLION ECONOMIC STIMULUS

C O N F I D E N T I A L SECTION 01 OF 03 KUALA LUMPUR 000195

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E.O. 12958: DECL: 03/16/2019
TAGS: EFIN EINV ECON ETRD PGOV MY
SUBJECT: MALAYSIA UNVEILS USD 16 BILLION ECONOMIC STIMULUS
PACKAGE

Classified By: Deputy Chief of Mission Rob Rapson for reasons 1.4 (b) a
nd (d)


1. (C) Summary and Comment: Facing rapidly slowing growth
and a probable recession in 2009, Malaysia announced its
second fiscal stimulus package on March 10. The larger than
expected stimulus package includes additional spending,
guarantees, equity investments and tax incentives amounting
to a total of RM 60 billion (USD 16 billion) over a two-year
period. While the GOM hopes this package will support GDP
growth in the near term, it may well drive Malaysia,s fiscal
deficit level to 7.6 percent of GDP for 2009, making Malaysia
a prime candidate for a sovereign credit downgrade by
international ratings agencies. Analysts question the
efficacy of the stimulus package and expressed disappointment
at the lack of specific reforms which Deputy Prime Minister
Najib and other GOM officials had said were being debated for
inclusion as part of the stimulus plan to improve the
competitiveness of Malaysia,s economy. Rather this package,
among other things, will increase market-distorting subsidies
and add 63,000 civil service jobs, the sector with the least
stimulative capacity. The inability of the government to
include much-needed reforms in the stimulus package raises
questions whether Najib -- who is expected to take over as
Prime Minister in a few weeks -- will have the political
strength and commitment to implement the kinds of reforms he
earlier promised. End summary and comment.

THE PRICE TAG: USD 16 BILLION


2. (U) On March 10 Deputy Prime Minister cum Minister of
Finance Najib Tun Razak unveiled Malaysia's second economic
stimulus package for RM 60 billion (USD 16 billion) over the
next two years, significantly more than expected by most
analysts who had predicted RM 10 to 35 billion (USD 2.7 to
9.5 billion) over the same two-year period. The new package,
which amounts to approximately 9 percent of Malaysia's GDP,
comes on the heels of a RM 7 billion (USD 1.9 billion)
stimulus announced on November 8.

WHAT'S IN IT


3. (U) According to the DPM, the emphasis of the package is
on cushioning job markets and disposable incomes; fostering
access to credit and reducing the cost of doing business; and
infrastructure and construction expenditures. The breakdown
of the USD 16 billion package includes: 1) USD 4 billion in
additional spending, including on worker re-training, 63,000
new civil service jobs, post-graduate education, schools,
roads, subsidies for food and utilities, and a host of other
expenses; 2) USD 6.8 billion in "guarantee funds" (which are
contingent liabilities, not an immediate expense); 3) USD 2.7
billion in equity investments through Khazanah, Malaysia's
Government-linked Investment Corporation; 4) USD 1.9 billion
in private financing and off-budget projects, including
expansion of the Penang airport and a fourth airport in the
Kuala Lumpur area; and 5) USD 811 million in tax incentives,
including double tax deductions for employers hiring laid-off
workers. While the plan includes a laundry list of goals,
much of the language is vague and figures are provided for
only some categories. The complete release is available at
www.treasury.gov.my.

FISCAL POLICY: DEFICIT UP, BUT DEBT LEVELS STILL MANAGEABLE


4. (SBU) The new stimulus package is expected to push
Malaysia's fiscal deficit to 7.6 percent of GDP in 2009,
according to official figures, but private analysts'
forecasts range from 7.8 to 10 percent, and predict
government revenues to come in below official forecasts. The
GOM already was running a deficit of 4.8 percent of GDP
before the economic crisis and stimulus packages. Dr. Yeah
Kim Leng, Managing Director and Chief Economist for Rating
Agency Malaysia, told visiting U.S. Treasury Office Director
for East Asia and the Pacific Chris Winship and Econoff that
Malaysia has been running deficits of approximately 2 to 3
percent since the 1997 Asian Financial Crisis. He projected
deficit levels to be "ugly" for the next three to five years,
and said international ratings agencies would be examining

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the figures closely. While debt levels were currently at a
"very manageable" 40 percent of GDP, a sharply increasing
fiscal deficit could bring Malaysia a downgrade. That said,
Yeah believed GOM would be able to finance an increased
deficit by tapping domestic liquidity, including the Employee
Provident Fund, Malaysia,s national pension program.


5. (SBU) On February 20, Mohamed Irwan Serigar,
Undersecretary for Economic and International Division,
Ministry of Finance, told Winship and Econoff that he did not
think the GOM should fret over its increasing deficit or a
potential downgrade by ratings agencies. Especially in an
environment where numerous other countries likely would be
downgraded as well, the bigger risk was doing too little. A
long recession would be much more painful than a downgrade,
he said.

REVISED GROWTH FIGURES ANNOUNCED



6. (SBU) Mr. Ooi Sang Kuang, Deputy Governor at Bank Negara,
pointed to declining exports as the primary source of
Malaysia's economic woes, as both commodity prices and demand
for electronics in Malaysia,s major export markets fall. He
opined that the first two quarters of 2009 would see negative
growth but the second half would see a turnaround when the
impacts of the stimulus would begin to be felt. The
challenge would be to instill confidence after those negative
figures come out and ensure the stimulus packages would be
effective.


7. (SBU) Ooi told the Embassy that the stimulus package was
designed to support 2009 GDP growth, which the GOM has since
revised downward to between -1 and 1 percent in line with
what most analysts predicted. He acknowledged that the
recessionary outlook for the U.S. and other developed country
economies would have a significant impact on Malaysia, which
would not be able to export its way to strong growth as it
did during the Asian Financial Crisis of the late 1990s and
would need to focus on strengthening domestic demand.

WITHER PROMISED REFORMS?


8. (SBU) Unfortunately, analysts noted that the stimulus
package included no economic reforms or restructuring, in
spite of Deputy Prime Minister Najib's earlier announcements
that the package would include measures "to make Malaysia
more competitive" in the global economy. It includes only
vague, future-tense language noting, "The Government will
take steps to liberalize the services sector," but no details
about what will be liberalized, when, or to what extent. In
February GOM officials told visiting Treasury Office Director
for Asia and the Pacific Christopher Winship and Econoff that
reforms were being discussed for inclusion in the stimulus
plan, including reform of the National Economic Policy (NEP)
which has given preferential treatment to ethnic Malays for
nearly 40 years and is widely perceived as the economy's
biggest obstacle to growth.


9. (SBU) Reactions to the government,s economic stimulus
plan, predictably, have been mixed. Citi Investment Research
and Morgan Stanley analysts reported that the amount was
higher than expected but are disappointed at the lack of
reform and some critics are skeptical with regard to
implementation. Ruling party politicians singled out areas
for praise, while opposition members highlighted
shortcomings, notably that it was insufficiently focused on
the poor. The opposition also complained that contracts
likely will be awarded to cronies, and that implementation
will be too slow to impact the economy before the fourth
quarter.


10. (SBU) Yeah explained that Malaysia had excess liquidity;
the savings rate was 15 to 16% of GDP. Nevertheless, the
bond market had "dried up" and IPO issuances had come to a
standstill. There was an overall lack of confidence in the
economy, exacerbated by a persistent view that there were
limited investment opportunities in Malaysia. The GOM needed
to figure out how to unlock the RM 177 billion in savings

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(down from RM 180 billion, but still high) without
significantly increasing deficit spending, he said.

WHAT HAPPENED TO THE FIRST STIMULUS?


11. (C) The RM 7 billion (USD 2 billion) stimulus unveiled in
November had not yet hit the ground, explained Dr. Sukhdave
Singh, Director of Bank Negara's Monetary Assessment and
Strategy Department. The public perceived it as having been
ineffective, but the fact was that the money was still with
agencies and Ministries and had not been disbursed. Yeah
added that, with its focus on construction, the first
stimulus package was poorly targeted: the vast majority of
the construction sector labor force in Malaysia was foreign.
(Note: A number of interlocutors were dismissive of foreign
workers, contribution to the Malaysian economy, including
their contribution to productivity and consumption. There
was a general sense that unemployment did not pose a
significant problem if it was confined to foreign workers,
and only grudging acknowledgement that foreign workers made a
sizeable contribution to Malaysian output and growth. End
note.)


KEITH