VZCZCXRO2548
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #1390/01 2080906
ZNR UUUUU ZZH
R 270906Z JUL 06
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 7196
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 1419
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 001390 
 
SIPDIS 
 
STATE PASS USTR - WEISEL AND JENSEN 
STATE PASS FEDERAL RESERVE AND EXIMBANK 
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN 
USDOC FOR 4430/MAC/EAP/J.BAKER 
TREASURY FOR OASIA AND IRS 
GENEVA FOR USTR 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EPET MY
SUBJECT:  Dueling Forecasts:  Malaysia Economic Update 
for July 2006 
 
REF:  Kuala Lumpur 0797 
 
¶1. (U) Summary:  Government officials insist that the 
economy is on track to meet their target of 6.0% growth 
in 2006, but Malaysia's most prestigious private 
forecaster recently downgraded its forecast to 5.2%. 
Private inflation forecasts are more in line with the 
Central Bank's projection of 3.5-4.0% for the year, 
though private analysts expect inflation to be at the 
top of that range.  The government says it is satisfied 
with the current ringgit exchange rate, but most 
private analysts believe it remains undervalued a year 
after its depegging from the dollar.  Meanwhile, in the 
working world, private firms are complaining about a 
shortage of skilled labor.   End Summary. 
 
Private Economists Forecast a Slower 2006 
----------------------------------------- 
 
¶2. (U) The Malaysian Institute of Economic Research 
(MIER) has revised downwards its growth forecast for 
2006 from 5.5% to 5.2%.  Most private forecasts are now 
in the 5.0%-5.5% range.  MIER expects growth to slow 
even further in 2007 to 4.8%.  Speaking at a July 24 
economic briefing, MIER Executive Director Dr. Mohamed 
Ariff said he expects domestic demand to decrease due 
to higher oil prices and interest rates.  He also 
expects the world economy to decelerate in 2007, 
leading to lower demand for Malaysia's exports.  While 
domestic investment will increase with the 
implementation of the Ninth Malaysian Plan (9MP; the 
government's five-year development plan), Dr. Ariff 
anticipated a lag before 9MP projects could be 
translated into growth boosting activities. 
 
Government Officials Remain Optimistic 
-------------------------------------- 
 
¶3.  (U) At the same July 24 seminar, Deputy Finance 
Minister Ng Yen Yen told reporters the government is 
confident of 6.0% percent growth in 2006.  "The 
government has "put in place initiatives to unleash the 
power of the private sector," she asserted. 
Separately, Finance Minister II Nor Mohamed Yakcop also 
upheld the 6.0% growth target this year.  However, he 
covered himself by saying if there were to be any 
revision of the target rate, Prime Minister Abdullah 
would announce it when he tables the 2007 Malaysian 
Budget on September 1.  (Comment:  The difference 
between 6.0% and 5.0% is politically significant.  The 
Ninth Malaysia Plan projects an average growth rate of 
6.0% for 2006-2010 (see reftel).  It will be very hard 
to achieve this average if economic growth falls short 
in the initial years.) 
 
Inflation Lingers 
----------------- 
 
¶4.  (U) Malaysia's consumer price index (CPI) rose a 
lower than expected 3.9% year-on-year in June, after 
recording a similar increase in May.  Analysts expected 
higher inflation following the government's June 1 
approval of a 12% increase in electricity rates.  The 
CPI also increased 3.9% year-on-year for January 
through June in 2006.  MIER's Dr. Ariff said inflation 
is a major concern, especially the secondary effects on 
prices of goods following increases in transportation 
and energy costs.  Ariff noted, however, that 
Malaysia's inflation is cost-pushed, which tends to 
produce a one-off surge in prices.  He did not expect a 
further boost unless oil prices escalate to a much 
higher level.  MIER projects 4.0% inflation in 2006 and 
3.3% in 2007. 
 
Interest Rate Expectations 
-------------------------- 
 
¶5.  (U) Mirroring Dr. Ariff, Bank Negara Governor Zeti 
Akhtar Aziz told reporters in Jakarta July 25 that the 
inflation rate might average 3.5% to 4.0% this year as 
there had been no "second-round" effects from higher 
fuel and electricity prices.  Zeti observed that if 
 
KUALA LUMP 00001390  002 OF 003 
 
 
inflation is cost-pushed, then there needed to be 
adjustments in the real economy and a prompt monetary 
response might not be warranted.  Her remarks split 
analysts' views as to whether the Central Bank will 
raise the overnight policy rate (OPR) by another 25 
basis points at the next monetary policy meeting July 
¶28.  The OPR currently is 3.5%.  Interest rate 
differentials between the Malaysian and U.S. rates 
remain wide at 175 basis points.  Lee Heng Guie, chief 
economist at CIMB bank, who had previously predicted 
another rate hike, is not so sure now.  He nevertheless 
believes Bank Negara will need to increase the rate by 
another 25 basis points before the end of the year. 
(Comment:  Even with a 25 point increase, the OPR would 
still be negative in real terms at current rates of 
inflation.) 
 
¶6.  (U) Commenting on interest rates, Dr. Ariff urged 
Bank Negara not to rush into raising rates as it could 
hurt the economy if external demand slackens in the 
fourth quarter.  He argued for keeping lending rates 
unchanged, but forcing deposit rates up, as he believes 
the profit margin of banks remains wide.  (Comment: 
Local bankers would not agree.)  However, Ariff 
admitted that there is space for upward adjustment in 
both lending and deposit rates. 
 
The Depegged Ringgit - One Year Old 
----------------------------------- 
 
¶7.  (U) On July 21, the ringgit celebrated the first 
anniversary of the removal of its RM 3.8 to $1.00 peg. 
After one year the ringgit has appreciated just 2.8% 
against the dollar, and currently states at RM 3.693 to 
the dollar. On May 10, the ringgit hit an 8-year high 
to reach 3.57 against the dollar, but it since has 
weakened along with other regional currencies. 
Rebutting an earlier press report that he was not 
pleased with the ringgit performance, Finance Minister 
II Nor Mohamed Yakcop said the government was not 
concerned as international market forces determine the 
currency's floating rate.  Most private economists 
continue to believe the ringgit is undervalued.  MIER's 
Dr. Ariff expects the currency to appreciate to RM 3.5 
to $1.00 by the end of the year. 
 
Help Wanted 
----------- 
 
¶8.  (U) Despite widespread stories in the press 
alleging that there are thousands of unemployed 
Malaysian college graduates, many firms maintain that 
there is a significant shortage of qualified workers in 
the labor market.  New evidence for this comes from a 
survey of small and medium sized enterprises (SME's) 
conducted by the Socioeconomic and Environmental 
Research Institute (SERI) of Penang.  Penang is 
arguably Malaysia's most developed state, but 100% of 
the responding firms cited a shortage of skilled 
workers as a matter of concern.  58% complained about 
low worker productivity, while 38% expressed 
dissatisfaction with Malaysian labor laws that make it 
difficult to fire unproductive or troublesome workers. 
 
¶9.  (U) SERI's research suggests that Penang (and 
probably other Malaysian) SME's face a significant 
disadvantage in the competition for highly qualified 
workers as they cannot compete with the pay levels 
offered by multinational corporations (MNC's).  The 
idea of using stock and profit sharing mechanisms as an 
incentive to attract workers to start up ventures has 
yet to take hold in Malaysia.  The survey found that 
the average salary for a newly-hired engineer with a 
master's degree was RM 2,500-RM 3,000 per month (about 
$675-$810).  Average earnings for a skilled production 
worker were RM 30 or more per day (about $8.10). 
 
¶10.  (U) Comment:  The SERI survey results suggest two 
conclusions.  First, the shortage of qualified workers 
in Malaysia is real and if not addressed could become a 
drag on the economy.  Second, the extra challenges 
facing SME's may limit the expansion of locally-grown 
 
KUALA LUMP 00001390  003 OF 003 
 
 
enterprises, leaving Malaysia more dependent on 
investment by MNC's for its future growth and 
development.  A third thought is that the Malaysian 
government may need to consider ways to steer college 
students towards academic programs that would make them 
more employable. 
 
LAFLEUR