VZCZCXRO4529
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #1833/01 2720939
ZNR UUUUU ZZH
R 290939Z SEP 06
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 7635
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 1431
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 001833 
 
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:  Not Too Sweet -- Malaysia Economic Update for September 
2006 
 
¶1. (U) Summary:  Malaysia's inflation rate unexpectedly fell in 
August from a 7-year high in July, moving real interest rates back 
into the positive zone again.  Bank Negara elected to keep interest 
rates unchanged and the Bank's governor signaled that the halt in 
interest rate hikes would likely continue.  Meanwhile, Motor vehicle 
sales fell again in August (the seventh straight decline this year) 
and Malaysia's self-inflicted sugar shortage continues.  End 
Summary. 
 
Inflation Slows in August 
------------------------- 
 
¶2. (U) Malaysia's inflation rate unexpectedly fell to 3.3% 
year-on-year in August, declining from a 7-year peak of 4.8% in 
March and 4.1% in July.  The significant moderation in the consumer 
price index (CPI) in August surprised many private analysts who had 
forecast an average increase of 3.6%.  The drop was largely due to 
lower price levels for food and transportation, which make up 31.4% 
and 15.9% of the CPI, respectively.  For January through August, the 
CPI increased 3.8% from the same period a year ago. 
 
¶3.  The inflation rate is now expected to stabilize at around 3.4% 
for September to December.  Private analysts have adjusted their 
forecasts to around 3.7% for 2006, as opposed to earlier projections 
of over 4%.  The Ministry of Finance forecasts inflation to be 3.9% 
for the year.  Although there are risks to the inflation outlook due 
to increased demand during the October holidays of Deepavali and 
Hari Raya, the government has imposed price ceilings on 15 essential 
food items, including meat and vegetables, from September 24 to 
October 31 to keep inflation in check (price ceilings on these items 
are in addition to price controls on a long list of other normally 
controlled items).  Also, a much talked about hike in the water 
tariff (which many analysts had predicted would take effect in 
January 2007) is now likely to be postponed as government officials 
refuted claims that the water utility company, Puncak Niaga Bhd, had 
won approval for a water-tariff hike. 
 
Positive Real Interest Rates 
---------------------------- 
 
¶4.  With the CPI declining to 3.3% year-on-year in August, real 
interest rates in Malaysia are back in the positive zone again. 
Currently, the benchmark 3-month time deposits rates are earning 
between 3 to 3.3%, 6-month between 3 to 3.5% and the 12-month 
between 3.7 to 4%.  The last time real interest rates were positive 
was in June 2005. 
 
Pause in Interest Rate Hikes Continues 
-------------------------------------- 
 
¶5.  Bank Negara kept the overnight policy rate (OPR) unchanged at 
3.5% following a meeting of its Monetary Policy Committee (MPC) on 
September 26.  This was the fourth time since May that the MPC 
decided not to raise rates.  On September 20, Bank Negara Governor 
Dr. Zeti Akhtar Aziz said the Central Bank would temporarily halt 
interest rate hikes and forecast inflation would moderate to 3% in 
2007, as there was no demand-pushed inflation.  Analysts generally 
expect the Central Bank to maintain the current OPR for at least the 
next 6 months.  CIMB chief economist Lee Heng Guie said Bank Negara 
is likely to maintain the OPR at the current level even if the Fed 
decides to cut rates.  Interest rate differentials between the U.S. 
and Malaysia remain wide at 175 basis points. 
 
Car Sales Dip 
------------- 
 
¶6.  Meanwhile, Malaysian motor vehicle sales fell 6.4% in August, 
the seventh straight monthly decline this year.  The Malaysian 
Automotive Association (MAA) said total industry volume last month 
slowed to 47,189 units against 50,417 in the same month a year ago. 
However, this was slight improvement over the month of July.  The 
association predicted sales this year would fall to 520,000 units, a 
5.6 percent decline from 2005's record sales of 551,042 vehicles. 
 
¶7.  An MAA spokesperson said there had been price uncertainty and 
confusion in the automobile market following the GOM's announcement 
of changes to the National Automotive Policy (NAP) on March 22 (when 
the GOM cut duties on locally made and imported cars in the NAP) and 
that this had produced  a "wait and see" attitude among buyers. 
Prices for new cars have fallen 1% and trade-in values have fallen 
30-40%.  The MAA representative said unattractive trade-ins values 
for second hand cars, coupled with tighter bank financing and higher 
 
KUALA LUMP 00001833  002 OF 003 
 
 
fuel prices, had slowed demand for new cars.  An industry source 
pointed out that about 75% of buyers normally trade in their 
existing cars when they purchase new ones. 
 
¶8.  Some analysts predict slightly stronger auto sales in the near 
term because of the upcoming Malaysian festive season, including Eid 
il Fitri (end of Ramadan), Deepavali, and Christmas.  Tempering 
this, however, are buyers' continuing concerns about lower trade-in 
values and the need for parents to budget for the new school year. 
One economist interviewed by EconFSN said he does not think the 
Malaysian used car market will turn around before 2007. 
 
Scrapping Old Cars for New Car Vouchers 
--------------------------------------- 
 
¶9.  In an effort to stimulate new car demand and reduce the 
inventory of used cars, car industry players have been advocating 
that the GOM issue vouchers to new car buyers in exchange for their 
trade-ins that are 15 years old or older, and that the GOM also ease 
credit financing on autos as well as relax restrictions on the 
export of reconditioned cars.  However, the GOM has said that it 
needs to study the scrapping policy further to ensure the 
implementation can be done properly.  One car dealer told EconFSN 
that the scrapping idea was first suggested 10 years ago, but that 
the current situation in the auto market had made its implementation 
more urgent. 
 
Banks Urged to Relax Auto Credit 
-------------------------------- 
 
¶10.  Auto lending has become stricter recently because of the 
increase in loan defaults, and there is speculation that Bank Negara 
has been tightening auto credit facilities for its member banks in 
an effort to improve the banks' nonperforming loan ratios.  In 
response to this, Finance Ministry Parliamentary Secretary recently 
urged banks to relax credit on car loans to address the slowdown in 
the auto market.  The gross ratio of non performing loans on autos 
currently stands at 4.5%.  (Comment:  Industry experts have been 
predicting this turndown in sales.  Last year, some banks were 
providing car loans with durations as long as nine years with no 
money down.  Anyone with even a half-way reasonable credit rating 
was able to buy a car.  The industry will be paying the price for 
these incentives for years to come.) 
 
Sugar Shortage Continues 
------------------------ 
 
¶11.  Malaysia has been experiencing a sugar shortage since April of 
this year.  Analysts believe this shortage is the result of 
speculation by wholesalers who are betting that the government will 
eventually be forced to increase the price they can charge for sugar 
(currently, the government has fixed the price of sugar in Malaysia 
about 50% lower than in neighboring Singapore), hoarding by 
consumers concerned about further shortages, and the export of sugar 
to countries where the price is higher than Malaysia. (Comment: Some 
analysts believe the speculation in sugar may be tied to the GOM's 
decision earlier this year to cut fuel subsidies. End Comment). 
 
¶12.  Meanwhile, consumers, food stall owners and other small and 
medium entrepreneurs are suffering.  One SME company (a manufacturer 
of chili sauce and tomato ketchup) told EconFSN that the sugar 
shortage has had an adverse effect on the company's production by 
forcing it to cease operations at least one day per week.  Econ 
Counselor observed a discussion between a traveler and a food stall 
operator in an airport.  The traveler wanted to buy a traditional 
small cake to take on the plane to enable him to break his fast 
during his flight (Muslim Malays are fasting during this month of 
Ramadan).  The traveler was astounded that the retailer did not have 
any of this traditional product for sale at this time of year.  The 
food stall operator responded that she wished she did as she was 
losing business, but she had no sugar to make cakes. 
 
¶13.  Concerned by the shortage, Deputy Prime Minister Najib, 
chairman of the Cabinet Committee on Essential Goods, said the GOM 
was monitoring the situation and giving time for local sugar 
manufacturers to keep their promises to increase production.  He 
warned, however, that the GOM would liberalize the sugar market if 
manufacturers failed to produce enough sugar to supply local needs. 
 
 
Looking For Ways to Overcome the Situation 
------------------------------------------ 
 
KUALA LUMP 00001833  003 OF 003 
 
 
 
¶13.  Commenting on media reports, a Malaysian Muslim Consumers 
Association (MMCA) official told EconFSN that he believed the sugar 
monopoly should be disbanded.  He also suggested that 
government-linked companies (GLC) involved in agriculture should be 
permitted to go into sugarcane production.  The country's sugar 
industry is controlled by 4 private sector producers.  Meanwhile, an 
economist said short term measures could taken to alleviate the 
shortage, such as increasing the number sugar licenses for 
wholesalers and imposing and enforcing stricter regulations on sugar 
wholesalers.  The government has taken one step already, but perhaps 
not the best one.  It recently fixed the previously free price for 
fine (powdered) sugar at a level comparable to that of coarse 
(granulated) sugar. 
 
¶14.  The MMCA official said there is currently only one company 
licensed to import sugar, and with only one permit holder, the price 
of imported sugar can be easily manipulated.  He said the GOM should 
issue additional permits to import sugar and appoint a government 
agency to monitor sugar imports throughout the distribution and 
retailing chain. 
 
LAFLEUR