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DE RUEHKL #0774/01 2470846
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R 030846Z SEP 08
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 1574
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
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RUCNISL/ISLAMIC COLLECTIVE

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 000774 
 
STATE PASS USTR - WEISEL AND BELL 
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 
SENSITIVE 
 
SIPDIS 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV MY
SUBJECT:  MALAYSIA'S 2009 BUDGET: CARING FOR THE POOR AND THE 
WELL-CONNECTED 
 
¶1. (U) SUMMARY:  On August 29 Prime Minister Abdullah Ahmad Badawi 
unveiled to Parliament a populist expansionary 2009 budget proposal 
designed to garner public support for the ruling coalition 
government.  Billed as a "caring" budget during hard economic times, 
it increases the government's operating expenditure by 16% over last 
year.  While Malaysia's sovereign rating has not been downgraded, 
analysts have expressed concerns about the fiscal deficit which is 
expected to reach 4.8 percent this year, effectively reversing four 
years of fiscal consolidation.   Abdullah's proposals for cutting 
taxes and increasing spending in a broad array of handpicked areas 
was criticized immediately by opposition leader Anwar Ibrahim, both 
for increasing the deficit and for not spending and cutting taxes 
enough.  On September 2 Anwar presented a formal response to 
Parliament which, rhetoric aside, demanded several key reforms 
including a call for open tenders for government projects in an 
effort to cut waste and create fiscal room for tax cuts and spending 
for real programs.  End Summary. 
 
BIGGEST WINNERS: PROJECTS BY "NEGOTIATED TENDER" 
 
¶2. (U) RM 6 billion (USD 1.4 billion) will be spent on the 
"development corridors" - a PM initiative involving various projects 
to be administered by the federal government, typically through 
non-transparent "negotiated tenders."  The East Malaysian states of 
Sabah and Sarawak, where opposition leader Anwar Ibrahim reportedly 
is courting Members of Parliament to cross over and form a new 
government with him as Prime Minister, are each slated to receive RM 
3 billion (USD 88 million) for badly-needed roads and other 
infrastructure projects.  Perhaps the biggest winner is public 
transportation, a hot topic since the government cut fuel subsidies 
in June, resulting in an overnight 41% price hike at the gas pump. 
The budget promises RM 35 billion (USD 10.3 billion) in expenditures 
over the next five years to improve efficiency in public 
transportation, coupled with a RM 3 billion (USD 88 million) soft 
loan.  Scomi, a company owned by the PM's son, stands first in line 
to be awarded contracts for busses and trains. 
 
SWEETS FOR ALL 
 
¶3. (U) In this time of rising food and energy prices, high 
inflation, and a strengthening political opposition, the budget 
promises increased spending on food subsidies, low-income housing, 
public transportation, and agricultural production.  It includes 
increased investments in education and health care, with RM 160 
million (USD 47 million) earmarked for Orang Asli, Malaysia's 
indigenous communities who typically comprise the poorest of the 
poor.  The government will set aside RM 100 million (USD 29 million) 
to establish a new "Urban Microcredit Financing" program for 
households earning less than RM 2000 (USD 588) per month.  Increased 
funding also will be doled out to the tourism sector and the police 
force.  Government employees, who received a 35% salary increase 
last year, are to receive a one-month bonus to be paid out in two 
installments, in September and December.  Tax rates will be lowered 
and an array of tax exemptions have been promised.  The poverty line 
was raised so more people could qualify for assistance and the 
income tax floor was raised to RM 35,000 (USD 10,300) so that 
households earning less than that amount would not pay income tax. 
For the middle and upper classes, individual income tax rates were 
lowered by one percent.  Import duties were reduced or eliminated 
for fertilizer, solar energy panels, some food items and small 
kitchen appliances.  Taxes on telephone service and on interest 
income were eliminated. 
 
OPERATIONAL REVENUES AND DEFICIT UP 
 
¶4. (U) The new budget represents a 16% increase in the Government's 
operational budget over the previous year to a total of RM 154.2 
billion (USD 45.4 billion), more than double the level when PM 
Abdullah took over in 2003.  After chipping away at the deficit year 
by year to 3.2% in 2007, the Government estimates the 2008 deficit 
will reach 4.8% of GDP but expects to lower this figure to 3.6% in 
2009, in spite of its laundry list of new benefits and tax 
exemptions.  International press reports quoted Standard & Poor's 
rating analyst Takahira Ogawa saying they would not downgrade 
Malaysia's sovereign rating from an A-Minus immediately, in spite of 
concerns over fiscal weakness.  "We have to see whether this is a 
one-off expansionary fiscal policy or there will be a medium-term 
implication of the fiscal expansionary policy," he said.  However, 
he also warned that sustained incidents of such budgets would not be 
good for fiscal consolidation and that S&P was keeping an eye on the 
size of the debt burden and the fiscal deficit.  Analysts are 
 
KUALA LUMP 00000774  002 OF 002 
 
 
watching negative real interest rates closely. 
 
OPPOSITION COMPLAINTS AND CONTRADICTIONS 
 
¶5. (U) In his initial statement, opposition leader Anwar Ibrahim 
presented his top complaints:  first, that increasing the deficit 
was irresponsible; second, that the tax cuts did not go deep enough; 
and third, that the government needed to implement open tenders for 
its projects.  On September 2 in his formal prepared statement to 
Parliament, Anwar criticized the GOM's spending initiatives at 
length for being "too little too late." 
 
A POLITICIAN'S ARITHMETIC 
 
¶6. (SBU) When ECONOFF asked one opposition contact about Anwar's 
arithmetic -- spend more, tax less, and thereby reduce the deficit 
-- he responded that the real trick was cleaning up the system. He 
claimed that 50 to 60 percent of money spent on government contracts 
was "padding" that went straight into the pockets of cronies.  The 
opposition's proposed reforms would free up approximately one third 
of the governments revenue, he said.  He pointed out that the 
government's operating expenditure was now more than 70% of its 
total budget, which was higher than most other countries. 
 
OPPOSITION'S ANSWER: CLEAN UP THE GRAFT 
 
¶7. (U) The opposition's proposed reforms include ending racial 
preferences, implementing open tenders for all government contracts, 
reviewing approved mega-projects, and auctioning off permits to 
import automobiles to the highest bidder. 
 
¶8. (U) "One of the core pillars of the PKR economic agenda is that 
all government contracts must be tendered in an open, competitive 
and transparent manner," Anwar said, calling for equal opportunity 
for all qualified companies.  However, this would be implemented on 
a gradual basis, commencing in 2009 with projects or supply 
contracts worth more than RM 10 million (USD 2.94 million), and 
extending to all tenders by 2015. 
 
¶9. (SBU) Opposition contact told ECONOFF that the "gradual" approach 
was because PAS, the Islamic Party in the opposition alliance, was 
concerned about implementing reforms too quickly.  While they 
supported the main ideas, they wanted to see how their constituents 
would be affected, particularly in the PAS-controlled states. 
 
¶10. (U) Anwar proposed a "rigorous priority review" of all proposed 
mega-projects costing more than RM 1 billion (USD 294 million) to 
assess their socio-economic viability, affordability, and intended 
impact on national development.  The review would be conducted "as 
transparently as possible" and would include "independent and 
credible professional bodies and individuals." 
 
¶11. (U) Anwar also criticized the government's practice of handing 
out approved permits (APs) for importing automobiles to a "select 
pool of 'businessmen'."  Estimating each AP's value at RM 25,000 
(USD 7353), Anwar said they should be auctioned to the highest 
bidder, gaining the government an additional RM 1.75 billion (USD 
515 million). 
 
¶12. (U) More broadly, Anwar called for "the removal or 
liberalization of archaic or self-defeating entry barriers that 
stand in the way of ensuring sustainability and improving growth in 
various sectors to benefit all Malaysians."  His party would publish 
and promote in greater detail "the entire policy regime of its 
Malaysian Economic Agenda" in the near future, he said in his 
statement. 
 
¶13. (SBU) COMMENT:  The only thing surprising about this year's 
budget was that there were no big surprises.  Everyone expected the 
expansionary fiscal policy during the ongoing economic downturn.  No 
one seemed surprised that large sums predictably were being dished 
out for projects, with cronies undoubtedly first in line.  The 
budget appears to be a carefully crafted balance between spreading 
new money around to the poor while still satisfying the demands of 
cronies -- no surprise there either. 
 
KEITH