VZCZCXRO4579
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #0419/01 0690934
ZNY CCCCC ZZH
R 100934Z MAR 06
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 6137
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 KUALA LUMPUR 000419 
 
SIPDIS 
 
SIPDIS 
 
STATE PASS USTR FOR B. WEISEL AND J. JENSEN 
USDOC FOR 4430/MAC/EAP D.BISBEE AND J. BAKER 
 
E.O. 12958: DECL: 03/09/2016 
TAGS: ETRD ECON PREL PGOV MY
SUBJECT: SCENESETTER FOR VISIT TO MALAYSIA OF USTR 
AMBASSADOR KARAN BHATIA 
 
Classified By: Deputy Chief of Mission David Shear for reasons 1.4 (B a 
nd D) 
 
¶1. (C) SUMMARY:  Malaysian-American relations are good and 
improving; the March 8 rollout of the FTA added momentum to 
the upward trend.  This moderate Muslim-majority state is our 
tenth-largest trading partner worldwide, and is a reliable, 
if quiet, partner in the fight against terrorism.  While 
moving slowly away from the anti-Western rhetoric of 
former-Prime Minister Mahathir, Malaysia continues to oppose 
us on some key international issues.  In the economic arena, 
there still are some who champion the paradigm of north-south 
conflict, despite the role that economic globalization has 
played in Malaysia's development.  "Bumiputera" preferences 
for ethnic Malays remain strongly entrenched across wide 
swaths of the economy.  Despite this, the government appears 
strongly committed to the FTA negotiations.  While there are 
limits to the price they are willing to pay, Malaysian 
leaders see an FTA as necessary to maintaining the country's 
economic competitiveness within the Asia-Pacific region. 
They will be looking to us for innovative compromises that 
will permit them to pursue their domestic socio-economic 
goals, while still meeting the requirements of a 
comprehensive FTA.  End Summary. 
 
Political Landscape 
------------------- 
 
¶2. (C) While Malaysia has plenty of warts, it remains a rare 
example of an Islamic-majority country that is stable, 
civilian-led and prosperous.  Malaysia has also maintained a 
largely tolerant social system and a tightly managed 
democracy, with the same multi-racial coalition in power 
since independence in 1957.  While we continue to urge the 
government of Malaysia to improve its own governance, we also 
recognize the constructive role Malaysia can play in the 
Islamic world and have encouraged Malaysians to increase 
support for moderation and progress in the Middle East. 
 
¶3. (C) Prime Minister Abdullah Badawi is a breath of fresh 
air after the long-serving and vituperative Mahathir Mohamad, 
who retired in late 2003.  Abdullah promotes a tolerant, 
progressive approach to religion that he calls "Islam 
Hadhari" (civilizational Islam).  He is publicly committed to 
fighting corruption and reining in costly mega-projects, 
though his government's follow-through has been 
disappointing.  His mild-mannered and cautious approach has 
also led critics to question his leadership and 
effectiveness, but his ruling coalition remains secure. 
Abdullah's chief potential rival, Deputy Prime Minister (and 
Defense Minister) Najib Razak, plays for now the role of a 
loyal bulwark.  After two years in power, Abdullah has 
appealed to the public for patience in delivering reform.  As 
long as the economy continues to grow healthily, the public 
will grant him that. 
 
Economic Situation 
------------------ 
 
¶4. (C) In his early days, PM Abdullah made rural development 
and control of government spending, partly as a means to 
encourage private sector led growth, his top economic 
priorities.  So far, only his reduction of the government's 
deficit - now down to 3.8 percent of GDP - can be chalked up 
as a clear success.  Abdullah's partisans say that the Ninth 
Malaysia Plan (NMP; a five year plan for economic policy and 
development spending) will be the vehicle for advancing his 
other economic goals, but the NMP will only be unveiled at 
the end of this month. 
 
¶5. (C) Meanwhile cuts in government subsidies for gasoline 
and diesel fuel - one of the steps taken to rein in the 
deficit - have proved highly unpopular, and raised concerns 
about inflation.  Increases in prices of other 
government-managed commodities, such as electricity, may be 
in the works.  For now, the economy is in reasonably good 
shape, with projected growth of around 5.5 percent in 2006 
and official inflation of around 3.5 percent (although 
private analysts believe the real rate of price increases is 
higher).  However, the government may be facing a tough 
choice in the coming year between stimulating the economy to 
get back on a higher growth track, or raising interest rates 
to control inflation. 
 
Malaysia's International Posture 
-------------------------------- 
 
¶6. (C) Malaysia currently is the chair of the Non-Aligned 
 
KUALA LUMP 00000419  002 OF 002 
 
 
Movement (NAM), the Organization of the Islamic Conference 
(OIC) and of ASEAN.  Malaysia hosted the ASEAN Summit and the 
East Asia Summit last December, and will host the ASEAN 
Regional Forum ministerial this summer.  Secretary of State 
Rice has told the ASEAN foreign ministers of her plans to 
attend the ARF meetings in July.  Malaysia backs the 
six-party DPRK nuclear talks and supports Iraqi 
reconstruction efforts, but has been overeager to embrace 
Hamas and defend the Iranian nuclear program.  The foreign 
ministry seems to be moving slowly away from some of 
Mahathir's anti-Western rhetoric and policies, but retains 
friendships with troublesome states like Cuba, Zimbabwe, 
Sudan, Syria and Uzbekistan.  The Malaysian government is 
publicly supportive of China's "peaceful rise" and recently 
signed a defense cooperation MOU with China, despite 
lingering suspicions among senior Malaysian military 
officials of China's long-term intentions.  Malaysia has 
actively supported peace efforts in the southern Philippines 
and Aceh in Indonesia. 
 
Counterterrorism 
---------------- 
 
¶7. (C) Malaysia generally has been a reliable and 
constructive partner on counterterrorism.  In 2003, Malaysia 
established the Southeast Asia Regional Center for 
Counterterrorism (SEARCCT), which now runs a full schedule of 
multilateral training courses, many conducted with U.S. 
support.  While the Malaysian leadership firmly opposes 
terrorist organizations at home, it is deeply uncomfortable 
with any association of Islam with terrorism, and frequently 
lectures us on the need to eschew terms such as "Islamic 
terrorists." 
 
The FTA Negotiations 
-------------------- 
 
¶8. (C) The Malaysian Cabinet gave its approval in December to 
begin negotiations on an FTA.  We have heard that the Finance 
Ministry was the only agency that opposed the negotiations in 
the preliminary discussions, but that the whole Cabinet voted 
in favor in the end.  Subsequent discussions with Malaysian 
officials suggest that Finance's objections relate to the 
inclusion of government procurement in the negotiations.  We 
also have encountered concerns at Bank Negara (the central 
bank, responsible for regulation of the financial sector) 
about too rapid liberalization of financial services. 
 
¶9. (C) Private sector understanding of the FTA process is 
shallow.  The Malaysian government has not yet evolved the 
consultative mechanisms that the USG employs to engage our 
private sector.  In the brief period since the rollout, the 
only private comment has come from AIDS activists concerned 
about the potential impact on pharmaceutical prices and drug 
availability.  However, there remains a small, but vocal, 
contingent of officials and public opinion makers who 
continue to view the world from a 1970's perspective of 
north-south conflict.  The anti-globalization advocates are 
likely to take aim at the FTA negotiations at some point. 
 
¶10. (C) The strongest opposition is likely to come from those 
whose individual interests would be adversely impacted by 
economic reform, most notably ethnic Malays and other 
indigenous peoples who benefit from bumiputera (translated as 
"sons of the soil") preferences.  Such preferences pervade 
almost every aspect of the economy - from reserving retail 
space on the shelves of hypermarkets, to preserving local, in 
particular Malay, control of domestic banks.  They are 
perceived by the political elite as necessary to maintain 
racial harmony, or at least to retain control the Malay vote. 
 We also are likely to encounter resistance to addressing 
some Islamic elements of Malaysia's economic policy, such as 
halal rules for food products. 
 
¶11. (C) Despite these potential sticking points, the 
Malaysian government appears to be strongly committed to 
successfully concluding the FTA.  While there are limits to 
the price they are willing to pay, Malaysian leaders see an 
FTA as necessary to maintaining the country's economic 
competitiveness within the Asia-Pacific region.  They will be 
looking to us to suggest compromises that will permit them to 
pursue their domestic socio-economic goals, while still 
meeting the requirements of a comprehensive FTA.  Or as MITI 
Minister Rafidah put it, to devise a prenuptial agreement 
that is sufficiently flexible to allow both parties to 
proceed to a happy marriage. 
LAFLEUR