VZCZCXRO8954
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #1403/01 2600646
ZNR UUUUU ZZH
R 170646Z SEP 07
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 9963
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 1502
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHBY/AMEMBASSY CANBERRA 2384

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 001403 
 
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 MY
SUBJECT:  Malaysia's GDP Growth Beats Expectations 
 
REF:  KUALA LUMPUR 
 
SUMMARY 
------- 
 
¶1. (U) Malaysia's economic outlook remained positive in the second 
quarter of 2007 as GDP rose 5.7% year-on-year, easily exceeding the 
5.3 % figure analysts had forecast.  Services took the lead in 
driving the economy, and combined with expansion in mining and 
construction, they more than mitigated the anemic performance of the 
manufacturing and agriculture sectors.  Malaysia's exports and 
imports remained weak in Q2 due to sluggish demand for electrical 
and electronics products.  Total fixed investment, however, gained 
momentum, and public consumption rose, albeit slower than expected 
despite the implementation of the Ninth Malaysia Plan (9MP) 
projects.  The financial position of the Government of Malaysia 
(GOM) reverted to a fiscal surplus of 2.4% of GDP in the second 
quarter.  Foreign reserves remained healthy. 
 
¶2. (U) Summary (continued):  The Central Bank kept  its key interest 
rate steady at 3.50% to support domestic growth.  Bank Negara 
closely monitors inflation risk and fluctuations of the ringgit 
against the dollar and other regional currencies.  The GOM continues 
to adhere to its forecast of 6% overall growth for 2007, while 
analysts predict a slower growth rate of between 5.5 to 5.8%.  End 
Summary. 
 
Services Leads Growth 
--------------------- 
 
¶3.  (U) Malaysia's GDP expanded 5.7% year-on-year in the second 
quarter of 2007 -- beating the 5.3% forecast of many analysts -- on 
strong domestic demand.  The economy grew a revised 5.5% 
year-on-year in 1Q, and 5.9% year-on-year in 2006. 
 
¶4.  (U) On the supply side, services were the prime mover of the 
economy, expanding 9.2% year-on-year in 2Q.  Consumption-related 
finance and business services, as well as the increasing demand for 
computer-related and other professional services, helped buoy growth 
of the sector.  Similarly, the continuing momentum from the Visit 
Malaysia Year 2007 campaign has provided important support.  Tourist 
arrivals reached 10.7 million and brought in RM 24 billion ($ 6.8 
billion) of foreign exchange earnings in the first half of 2007. 
The government is optimistic in meeting the target of attracting 
20.1 million tourist arrivals and gaining exchange earnings of RM 
44.5 billion ($ 12.7 billion) for the year. 
 
¶5. (U)  Manufacturing, once the key driver of the economy, grew a 
meager 1.5% year-on-year due to continued weak demand for 
export-oriented industries goods, notably electrical and electronic 
products.  Mining reversed its previous contraction to grow a strong 
7.7% on higher output of crude oil and natural gas.  The increased 
demand for natural gas by domestic electricity producers, and 
stronger external demand for liquefied natural gas from Korea and 
Japan, accounted for the surge in production.  Agriculture 
contracted 0.9% on lower crude palm oil output due to unfavorable 
weather conditions.  The construction sector continued its growth 
momentum, rising 4.8% year-on-year, as the infrastructure projects 
of the 9th Malaysia Plan (9MP) and the oil and gas industry were 
rolled out. 
 
Counting on Domestic Demand 
--------------------------- 
 
¶6. (U) Domestic demand grew a solid 10.8% year-on-year in 2Q 2007, 
with private consumption rising 13.1% year-on-year.  Higher 
disposable income and stable labor market conditions augmented by 
strong prices of palm oil and natural rubber buoyed consumer 
spending.  Although the Malaysian Institute of Economic Research's 
(MIER) Consumer Sentiments Index (CSI) in 2Q showed a decline in 
optimism from the previous quarter, it was more upbeat from the same 
period a year ago, rising 11.7 points to 115.9.  MIER's survey 
indicated that consumers are confident of their employment 
prospects, financial outlook and current income.  Domestic spending 
increased almost immediately as the government raised the salary of 
the over one million civil service employees by between 7.5% to 42% 
and a doubling of the cost of living allowance on July 1.  Public 
consumption also increased a strong 10.2%, mainly on higher spending 
for salaries and supplies and services.  The government salary 
increase is expected to cost the GOM an additional RM 8 billion ($ 
2.3 billion) annually. 
 
 
KUALA LUMP 00001403  002 OF 003 
 
 
¶7. (U) Total investment expanded at a slower 6.6% pace during the 
second quarter of 2007, as compared to 9.9% in the previous quarter. 
 As the implementation of the 9MP projects picked up during 2Q, the 
government disbursed RM 6.2 billion ($ 1.8 billion), up from RM 5.3 
billion ($ 1.53 billion) of development spending in 1Q.  Government 
development spending focused primarily on high-multiplier impact 
projects, such as agriculture and rural development, transportation 
related infrastructure and public utilities.  Private sector capital 
spending was mainly in the manufacturing, construction, oil and gas 
sectors. MIER's Business Conditions Index (BCI) rose to a 3-year 
high, climbing 16.6 points to 122.1 in 2Q from 105.5 in 1Q and 
reversing two previous quarters of consecutive declines. According 
to the MIER survey, manufacturing sales rebounded in the 2Q as local 
orders surged and export orders turned around despite the dismal 
performance of the electrical and electronic industry. 
 
¶8. (U) Exports remained weak, growing just 3.0% year-on-year in 2Q. 
The sluggish demand for electrical and electronic products was 
compensated for to some extent by increased exports of primary 
commodities.  Imports moderated to expand a mere 1.4% in the quarter 
on lower intermediate imports, reflecting slower growth in imported 
inputs for manufactured exports, particularly for electronic 
products. 
 
Fiscal Surplus 
-------------- 
 
¶9. (U) The federal government recorded a fiscal surplus of RM 3.6 
billion ($ 1.03 billion), or 2.4% of GDP in 2Q 2007, from a fiscal 
deficit of RM 2.6 billion ($ 743 million), or 1.8% of GDP in 1Q, 
resulting in an overall fiscal surplus of RM 1 billion ($ 286 
million) or 0.3% of GDP in the first-half of 2007.  Total government 
spending rose 15.7% year-on-year in the second quarter of 2007. 
Development spending rose 19% year-on-year, driven by the scheduled 
implementation of the ninth Malaysian Plan projects.  Revenue 
collections rose 3.5% to RM 34.2 billion ($ 9.8 billion) in the 
quarter.  The fiscal surplus is expected to evaporate with the 
disbursement of more development funds for the implementation of the 
9MP and the increase in salaries for government employees over the 
next two quarters.  The government has projected the fiscal deficit 
to reduce to 3.2% of GDP in 2007 from 3.3% in 2006. 
 
Reserves and External Debt Increase 
----------------------------------- 
 
¶10. (U) Malaysia's foreign exchange reserves accelerated to $98.4 
billion as of the end of June 2007, from $82.5 billion at the end of 
December 2006.  Reserves, however, declined 1.5% to $96.8 billion by 
end-August, sufficient to finance 8.8 months of retained imports. 
Reserves fell in conjunction with the downturn of the global stock 
markets triggered by the sub-prime problems in August when there 
were some outflows of foreign portfolio funds.  Net portfolio 
investment remained positive with RM 14.5 billion ($ 4.1 billion) in 
2Q, down from RM 25.6 billion ($ 7.3 billion) in 1Q.  Net foreign 
direct investments (FDI) on a cash basis, however, rose 
substantially to RM 13.6 billion ($ 3.9 billion) in 2Q from RM 0.8 
billion ($ 229 million) in 1Q. 
 
¶11.  (U) Malaysia's external debt increased (in ringgit terms) to RM 
181.9 billion ($ 52.2 billion) at the end of June from RM 178.9 
billion ($ 51.3 billion) at the end of March as short-term external 
borrowing rose 19% to RM 46.9 billion ($ 13.4 billion).  Both public 
and private sector medium- and long-term external loans fell to RM 
135 billion ($ 38.6 billion) as of end-June from RM 139.5 billion ($ 
39.8 billion) as of end-March.  The Non-Financial Public Enterprises 
made higher debt repayments as a dollar-denominated bond matured and 
several companies cut their foreign debt exposure. 
 
 
Key Interest Rate Unchanged 
--------------------------- 
 
¶12. (U) Malaysia has maintained its key benchmark interest rate at 
3.50% since April 27, 2006.  That is unlikely to change unless the 
economy slows.  Bank Negara Governor Zeti Akhtar Aziz said the 
current interest rate is at an appropriate level supportive of the 
Malaysian economy and will not be affected by a possible rate cut by 
the Fed.  The Consumer Price Index (CPI) moderated to a 1.5% 
year-on-year increase in 2Q, the lowest rate observed since the 
third quarter of 2004.  Inflation was 2.6% in 1Q.  For 2007, Bank 
Negara maintained its outlook for inflation at 2% to 2.5%. 
 
 
KUALA LUMP 00001403  003 OF 003 
 
 
Outlook for 2007 
---------------- 
 
¶13. (U) In her statement accompanying the release of Bank Negara's 
second quarter report, Governor Zeti said she expected economic 
growth in the second half to remain firm.  The anticipated increase 
in tourist arrivals, additional output from new facilities in the 
oil and gas sector as well as the implementation of the 9MP projects 
will reinforce domestic demand, she said.  Zeti is optimistic that 
the economy will expand 6% in 2007. 
 
¶14.  (U) Comment: Although analysts share the central bank's view 
that growth will be stronger in the second half, they predict that 
the Malaysian economy will grow between 5.6 - 5.8% in 2007.  They 
are concerned about weak exports and the knock-on effects of the 
sub-prime crisis in the U.S. on Malaysia and other regional 
economies.  End Comment. 
 
SHEAR