VZCZCXRO4694
RR RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHPB
DE RUEHKL #0651/01 2060331
ZNR UUUUU ZZH
R 240331Z JUL 08
FM AMEMBASSY KUALA LUMPUR
TO RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHGV/USMISSION GENEVA 1599
RUEHC/SECSTATE WASHDC 1410

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 000651 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR OASIA AND IRS, STATE FOR USTR - WEISEL AND 
BELL, STATE FOR FEDERAL RESERVE AND EXIMBANK, STATE FOR 
FEDERAL RESERVE SAN FRANCISCO TCURRAN, USDOC FOR 
4430/MAC/EAP/HOGGE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV MY
SUBJECT: TREASURY DAS DOHNER'S VISIT TO MALAYSIA 
 
REF: KUALA LUMPUR 00543 
 
¶1. (U) Summary: Treasury Deputy Assistant Secretary for Asia 
Robert Dohner briefed Bank Negara officials on the U.S. 
economic and financial situation and exchanged views on 
Treasury's decision to include Malaysia in the executive 
summary of the U.S. Foreign Exchange Report. DAS Dohner 
defended the Treasury report as fair, and offered Bank Negara 
expanded opportunities to consult on the report. In a 
separate meeting, the Ministry of Finance explained the 
budgetary pressures that led to Malaysia's recent decision to 
sharply decrease fuel subsidies and noted the government 
intended to gradually dismantle price controls on food with 
the hope that economic growth and increasing income would 
cushion the blow.  The Ministry of Finance also informed DAS 
Dohner it would be sending a representative to hold 
non-binding discussions on government procurement at the July 
round of our bilateral FTA negotiations.  Subsequent 
discussions with Malaysian economists emphasized the 
difficulties caused by Malaysia's price controls. END SUMMARY. 
 
FOREIGN EXCHANGE REPORT 
 
¶2. (SBU) DAS Dohner's July 1 meeting with Bank Negara 
Assistant Governor Lillian Leong began with a readout on U.S. 
financial market issues and the U.S. economic outlook. At 
Leong's request, DAS Dohner then provided an overview of 
Treasury's discussion of Malaysia in its bi-annual FX report. 
 Dohner pointed out that the U.S. did not determine that 
Malaysia manipulated its currency; in fact no country has 
been designated a currency manipulator since 1994.  Rather, 
the report said Malaysia's current account surplus and low 
domestic investment suggests an undervalued currency that has 
contributed to macroeconomic imbalances. He said it was a 
matter of misalignment, not manipulation.  Dohner referred 
the central bank representatives to the annex of an earlier 
report that outlined how the U.S. Treasury judged possible 
misalignment and explained that China and Malaysia were at or 
near the top of list for the various indicators used in its 
determination. These indicators include the size and growth 
of reserves, curr 
ent account balances, and contribution of net exports to 
growth. 
 
¶3. (SBU) Bank Negara's Strategy Department Director Sukdave 
Singh responded that based on Treasury's indicators, there 
were other countries that should have been highlighted but 
were not.  Singh and DAS Dohner then exchanged views on Saudi 
Arabia which maintained a fixed exchange rate and Singapore 
which Singh noted had a significantly higher current account 
surplus and reserves and than Malaysia.  DAS Dohner explained 
that Treasury looked at an extensive range of indicators for 
the individual country examined.  He noted the failure of 
investment to recover in Malaysia after the Asian Financial 
Crisis and the fact that the real exchange rate had not 
appreciated despite Malaysia's surplus and the substantial 
terms of trade improvement. 
 
¶4. (SBU) Singh expressed Bank Negara's view that Malaysia's 
economic indicators were affected by their status as a small, 
open economy and a recent positive terms of trade shock. 
Singh asserted that 70 percent of Malaysia's trade surplus 
was due to commodities.  This was not because Malaysia's 
exchange rate was cheap, but rather, because "the world wants 
Malaysia's commodities," he said. Singh also noted that 
exchange rate volatility would harm Malaysia's large 
electronics export sector, which is part of global processing 
trade. Financial markets wanted a 15-20 percent increase in 
one year, something that perhaps could be accomplished in 
three years, he said. Singh reiterated that one should expect 
a current account surplus for Malaysia.  He cited Malaysia's 
aging society as having an impact on the savings-investment 
gap, although it should be noted that Malaysia has a lower 
dependency ratio than other countries in the region.Singh 
also pointed out that the types of investments have changed 
from large infras 
tructure projects and multinational corporations to smaller 
investments in the services sector and government spending in 
small-scale projects like schools instead of highways and 
bridges. Finally, Bank Negara made it apparent they are 
managing the ringgit with respect to Malaysian trade 
partners, with Singh mentioning that "if our trade partners 
appreciate, we will too." 
 
KUALA LUMP 00000651  002 OF 003 
 
 
 
¶5. (U) DAS Dohner explained that Treasury clearly drew a 
different conclusion than Bank Negara on the overall meaning 
of Malaysia's macroeconomic indicators, but suggested Bank 
Negara provide Treasury with a written summation of its views 
for Treasury's consideration. DAS Dohner said he believed 
Treasury's report was fair but was open to making additional 
efforts to exchange analysis to make sure the U.S. report is 
accurate. He also offered to send Treasury's Malaysia desk 
officer on TDY to Bank Negara to work with them directly. 
Leong politely thanked DAS Dohner but did not take him up on 
this offer. 
 
FUEL SUBSIDIES 
 
¶6. (U) At the Ministry of Finance, Deputy Secretary Ibrahim 
told DAS Dohner the June 6 price hike for subsidized gasoline 
and diesel by 41 percent and 63 percent respectively came as 
a shock to the Malaysian public (reftel).  Ibrahim explained 
that the move was necessary to reduce the government's fiscal 
burden.  He pointed out that there had been no price increase 
for just over two years and, with global prices skyrocketing, 
the Government had little choice. He said future increases 
were under consideration. 
 
¶7. (U) In a separate meeting, Dr. Yeah of Rating Agency 
Malaysia confirmed that Malaysia's oil and gas subsidies were 
unsustainable.  Approximately 40 percent of current revenue 
was being spent on oil and gas subsidies, he said, amounting 
to 6 percent of GDP.  While the GOM was reasonably 
comfortable with a small deficit in its development budget, 
seeing this as a worthwhile investment in the future of the 
economy, petroleum subsidies were cutting into its operating 
budget and contributing to a higher debt-to-export ratio. 
Malaysia was worried about being downgraded by ratings 
agencies, and probably would have been, had the GOM permitted 
debt to exceed 50 percent of export revenues. 
 
OTHER PRICE CONTROLS 
 
¶8. (SBU) Dr. Yeah discussed broader price controls in the 
Malaysian economy.  Usually only end-user prices are 
controlled, with rising input costs eroding producers' profit 
margins until they demanded that the GOM allow them to 
increase prices. Typically the GOM would relent only when 
"their backs were against the wall" and production began to 
be cut, he said. Dr. Yeah also expressed concerns over the 
quality of Malaysia's CPI, which heavily weights controlled 
prices and unrepresentative goods. 
 
 
¶9. (U) Dr. Yeah pointed out that when the effects of the July 
1 increases in electricity and natural gas rates come 
through, this will result in "massive adjustments."  He was 
not sure how the Malaysian economy would be able to cope with 
the shocks and noted there was political pressure on Bank 
Negara to hold the policy interest rate steady.  Bank Negara 
Governor Zeti had just announced a revised economic growth 
forecast of 4 to 5 percent of GDP for 2008, down from 6 to 7 
percent forecast earlier.  In February, RAM revised its 
forecast to 5 percent. 
 
TRADE NEGOTIATIONS 
 
¶10. (U) With regard to ongoing multilateral and bilateral 
trade negotiations, Dohner pointed out to Ibrahim the 
importance of Malaysia offering more than the existing market 
access.  He said the biggest sticking points were services, 
including financial services, and government procurement 
(GP).  Ibrahim responded that the GOM was "going through its 
internal processes," and MITI Minister Muhiyuddin was 
requesting a new mandate from Cabinet.  He said Muhiyuddin 
hoped to have a broad, national mandate to negotiate a deal 
that would be good for Malaysia, rather than having each 
Minister focus only on equities under his or her purview. 
 
¶11. (U) The Ministry of Finance would "be on the team" for 
the July 14-18 free trade negotiations in Washington, Ibrahim 
said.  The Ministry would send Dato' Zalika, the person who 
had been the key GP negotiator in previous rounds. She no 
longer covers GP but has a grasp of the issues necessary for 
a brainstorming session. 
 
 
KUALA LUMP 00000651  003 OF 003 
 
 
COMMENT 
 
¶12. (SBU) Bank Negara was passionate in its defense of its 
currency, reiterating that their exchange rate regime 
operated according to what they termed the "rules of the 
game".  However, it is clear that Malaysian authorities are 
attempting to control the price level, the exchange rate, and 
the interest rate, leading to a macroeconomic policy juggling 
act.  As Malaysia faces an increasingly challenging global 
environment, the government's ability to meet all of these 
objectives will be tested. 
 
¶13. This cable was cleared by DAS Dohner. 
KEITH