VZCZCXRO6363
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #1491/01 2770916
ZNR UUUUU ZZH
R 040916Z OCT 07
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 0062
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 1514
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 001491 
 
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:  Inflation and Auto Sales Rise; GOM Fuel Subsidies 
Unsustainable:  Malaysia Economic Update for September 2007 
 
 
¶1. Summary: 
 
-  Inflation in Malaysia increased in August, although the GOM 
continued to hold down prices on certain basic necessities through 
subsidies and price controls. 
 
-  Soaring global oil prices may soon force the GOM to reduce 
subsidies for gasoline and natural gas, which have cost the GOM 
billions of dollars this year. 
 
-  Following six months of declines, auto sales revived somewhat in 
August as talks between cash-strapped Proton and Volkswagen 
continue. 
 
End Summary. 
 
Inflation Up in August 
---------------------- 
 
¶2.  Malaysia's consumer price index (CPI), a measure of the 
country's inflation rate, increased 1.9% to 105.7 in August 
year-on-year, after rising 1.6% in July.  This was the highest 
increase since February with food prices, which accounted for nearly 
one third of the consumer basket, rising the fastest.  Food and 
non-alcoholic beverages increased 2.9% in August compared with 2.3% 
in July.  From January to August the CPI rose 2% from the same 
period a year ago.  For the whole of 2007 the GOM expects inflation 
to be contained at 2%.  [Comment:  The GOM is fairly confident it 
will be able to keep inflation at bay because about 20% of items in 
the CPI basket are price-controlled.  Deputy Prime Minister Najib 
Tun Razak has stated openly that the GOM will continue to take steps 
to protect consumers from escalating prices by subsidizing and/or 
fixing the prices of certain commodities and daily necessities. End 
comment]. 
 
Subsidies Keep Gas Prices Low 
----------------------------- 
 
¶3.  The GOM has kept its promise to maintain price controls of 
domestic pump gasoline despite rising crude oil prices, which have 
forced the GOM to pay out about RM 14 billion (USD 4 billion) in 
gasoline subsidies so far this year.  Meanwhile national oil company 
Petroliam Nasional Bhd (Petronas) is hoping the GOM will allow it to 
raise the prices it charges consumers and Malaysia's national power 
company, Tenaga Nasional Berhad, for natural gas (Malaysia relies 
heavily on natural gas powered generators to produce electricity). 
Subsidies for natural gas have cost Petronas RM 15 billion (USD 4.3 
billion) as of September this year. 
 
¶4.  Petronas President and CEO Mohd Hassan Merican warned that fuel 
subsidies are not sustainable over the long term because of 
skyrocketing global oil prices.  The GOM has agreed to look into the 
matter but stated it must first study the impact of reducing 
subsidies on consumers.  Merican said Petronas is currently allowed 
to charge consumers RM 6.40 (USD 1.83) per mmBtu for domestic usage 
although the market price is about RM 40 (USD 11.4) per mmBtu. 
[Comment:  Given the substantial price difference between subsidized 
and non-subsidized gasoline and natural gas, there is a general 
consensus among analysts here that the GOM will need to begin 
reducing subsidies, and raising prices, on these products early next 
year, probably following Malaysia's next federal election.  End 
comment]. 
 
Consumers Feeling the Pinch of Rising Prices 
-------------------------------------------- 
 
¶5.  Except for civil servants (who received a hefty salary hike and 
cost of living increase on July 1), wage earners in Malaysia are 
starting to feel the pinch of price increases.  Prices of milk and 
coffee rose between 10 to 30% in April and are likely to increase 
again in November.  The GOM allowed the price of flour to increase 
by 18.7% to RM 1.90 (USD 0.54) per kilo on September 15, prompting 
bakers and noodle makers to raise the prices of bread, biscuits and 
noodles by between 20 to 25% as of October 1.  The Malaysian Sauces 
Manufacturers also raised the prices of various sauce products by 
10% on September 2.  Bernas, the GOM authorized rice agent, had 
announced plans to increase prices of local and imported rice by 
between 1.8 to 7.7% in July but was instructed to abort the decision 
until GOM approval is obtained. 
 
¶6.  More price increases are in the pipeline.  The Kuala Lumpur and 
Selangor Taxi operators intend to request a fare increase of 50% 
 
KUALA LUMP 00001491  002 OF 002 
 
 
from RM 2 to RM 3 (USD 0.57 to USD 0.86) for the flag fall rate and 
a ten Malaysian cent (USD 0.03) charge for every 100 meters instead 
of the current 150 meters.  Works Minister  Samy Vellu said 
Malaysians can expect a 10% increase in toll rates, with eight toll 
road concessionaires raising their charges from Jan 1, 2008. 
However, he said the Works Ministry is working on several proposals 
to spread part of the cost to the concessionaires and the GOM.  The 
increase in toll rates is likely to inflate the prices of all goods 
distributed via Malaysia's extensive network of toll roads. 
 
New Car Sales Up 
----------------- 
 
¶7.  New car sales for August grew 6 percent to 47,585 units over 
44,926 units in the previous month, after declining in the first six 
months of this year.  Overall car sales in Malaysia fell 12 percent 
to 220,739 units in the first half of 2007 from 251,340 units in the 
first half of 2006.  According to the Malaysian Automotive 
Association (MAA), the improvement in August sales was due to the 
launch of several new models by Malaysia's two national car 
manufacturers, Perodua and Proton, and to the hefty mid-summer 
salary increase for civil servants. 
 
¶8.  A local automotive analyst told EconFSN he expected auto sales 
to continue their recovery for the rest of this year as more new 
models are launched.  He added that he believed the used car market 
in Malaysia will also stabilize toward the end of the year.  In 
terms of market share, Perodua and Proton accounted for 55.5 percent 
of the domestic market but foreign makes are also selling well, led 
by Japanese (principally Toyota, Nissan and Honda) and Korean makes. 
 
 
GOM Props Up to National Car Companies 
-------------------------------------- 
 
¶9.  To lift the distressed auto market, the GOM has allocated RM 750 
million (USD 221 million) to subsidize the two national car 
companies' manufacturing costs.  Recently, Proton's share of the 
domestic car market dropped to around 21.3 percent compared to 34.2% 
for Perodua, which specializes in compact cars.  With a steady 
decline in its share of the domestic market, Proton has announced 
plans to export about 100,000 cars within the next few years, and 
has signed joint ventures with dealerships in China and Thailand to 
sell its new "Persona" sedan in those markets.  Proton is also 
talking with several dealerships in India. 
 
Proton (Still) Desperately Seeking a Strategic Partner 
--------------------------------------------- --------- 
 
¶10.  Meanwhile Prime Minister Abdullah Badawi said talks between 
Proton and German automaker Volkswagen (VW) on a possible tie-up 
were continuing.  Although they appeared to have stalled earlier 
this year, Abdullah said the talks were revived when he and 
officials from Khazanah, the GOM's investment arm, met with VW 
officials in June in New Jersey, and more recently in Bangkok. 
Abdullah said talks with France's PSA and US-based General Motors 
have been called off.  VW Chief Executive Maring Winterkorn is 
expected to visit Malaysia in the next few weeks with some analysts 
speculating that a deal could be concluded during his visit. 
 
KEITH