VZCZCXRO9133
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHKL #1063/01 3400803
ZNR UUUUU ZZH
P 050803Z DEC 08
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC PRIORITY 2079
INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE PRIORITY
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION PRIORITY
RUEHRC/USDA FAS WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHGV/USMISSION GENEVA PRIORITY 1644

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 001063 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EEB/TPP/BTA AND EAP/MTS, 
TREASURY FOR OASIA AND IRS, 
STATE PASS FOR USTR - WEISEL AND BELL, 
STATE PASS FOR FEDERAL RESERVE AND EXIMBANK, 
STATE FOR FEDERAL RESERVE SAN FRANCISCO TCCURRAN, 
USDOC FOR 4430/MAC/EAP/J.BAKER, 
USDA FAS FOR OA/BIG, ITP/AAD, 
COMMERCE FOR 4430/MAC/MICHAEL HOGGE, 
GENEVA FOR USTR 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV MY
SUBJECT: MALAYSIA: VIEWS ON ECONOMY TURN NEGATIVE 
 
¶1. (SBU) Summary: The central bank of Malaysia released a 
relatively upbeat report on third quarter economic 
performance November 28, highlighting GDP growth of 4.7 
percent despite deteriorating global economic conditions. 
The central bank acknowledged that Malaysia, as a highly open 
economy, would be impacted by external factors going forward. 
 Members of the U.S. business community have told the 
Ambassador in several recent meetings that economic 
conditions in Malaysia have worsened considerably since the 
beginning of the fourth quarter and they are concerned that 
the government,s pronouncements about the economy would play 
poorly with the public when the real depth of the problems 
Malaysia faces become clear.  Export orders, which weakened 
significantly in the third quarter, have fallen dramatically, 
according to U.S. business executives, and demand for 
products in the domestic market were falling along with 
investment in core areas of the economy like energy and 
manufacturing.  The cental bank Governor told US bankers in 
mid-November the government was aware of this sharp downturn 
and was prepared to act as necessary to support economic 
growth.  The central bank lowered the benchmark interest rate 
on November 24, and a central bank official told Econcouns 
December 2 it had lowered its in-house forecast for GDP 
growth in 2009 to 2.5 percent and its real concern was that 
the policy tools available to the government could only 
partially offset the impact of falling external demand on the 
economy.   End Summary. 
 
¶2. (SBU) Comment: The government of Malaysia faces two 
problems: a sharp economic downturn and a longstanding need 
to make difficult economic reforms required to improve the 
economy's efficiency and competitiveness.  The government has 
used appropriate fiscal stimulus and monetary easing to 
smooth out the shock that the financial crisis represents, 
and Deputy PM Najib has said many of the right things about 
the need for international cooperation to address the global 
economic crisis, including rejecting protectionism.  Still, 
with the economy facing a significant slowdown, the 
government of Malaysia will face hard political choices over 
whether it will stick with the economic policy status quo or 
dismantle its own trade and investment barriers that hinder 
growth. These economic problems come in the midst of an 
election cycle for the ruling UMNO party, and also come at a 
time of increased opposition challenge, factors that 
encourage Malaysian government leaders to be overly positive 
in their public economic assessments and to seek short term 
fixes over politically difficult reforms. Adjustments that 
touch on race-based preferences will be a praticularly 
sensitive area at this moment, as racial rhetoric between 
UMNO and its Malay partners has intensified. End Comment. 
 
Upbeat Assessment by Central Bank 
 
¶3. (SBU) Bank Negara (BN), Malaysia,s central bank, gave a 
relatively upbeat assessment to third quarter economic 
figures released on November 28, highlighting a slowing but 
reasonably resilient economy.  GDP growth had slowed from 8.3 
percent in Q2 to 4.7 percent in Q3, drawn lower by lower 
fixed capital formation and FDI in the face of cautious 
business sentiment. BN noted relatively strong Q3 export 
numbers were supported by high prices, but chose not to point 
out that with prices of key commodities falling and export 
orders drying up; future prospects would be significantly 
gloomier. 
 
Gloomy U.S. Business Views 
 
¶4. (SBU) In recent AmCham briefings with the Ambassador, U.S. 
business leaders emphasized that economic conditions in 
Malaysia had taken a decided turn for the worse during the 
month of November and that the government,s &happy talk8 
on the economy which focused on previous performance could 
turn out to be counterproductive as the public became aware 
of the difficulties ahead.  Firms like 3M that have a 
real-time read on shifts in domestic demand, said orders from 
 
KUALA LUMP 00001063  002 OF 003 
 
 
local firms had fallen off a cliff since the end of October. 
Dell also reported dramatic cuts in IT orders from local 
customers.  Other U.S. firms were even more pessimistic. 
Intel and Linear Technologies representatives indicated that 
export orders had dried up, that some customers could not 
obtain trade financing and that most firms were looking at 
ways to cut back operational costs, including extended leave 
or layoffs for employees, to weather the downturn.  Energy 
firms like ExxonMobil and Murphy Oil said investment projects 
were either being put on hold or cut back. 
PriceWaterhouseCooper, which provides advice to a wide 
selection of foreign firms, concurred with the assessment 
that there is a pullback on business investment 
across-the-board. 
 
¶5. (SBU) Despite relaying these same concerns to government 
leaders, the head of a major U.S. banking firm said key 
players like the Second Finance Minister Yakcop just did not 
seem to get the seriousness of the situation Malaysia faced. 
According to this contact, Yakcop held a roundtable of 
business leaders following the announcement of the fiscal 
stimulus package to see what additional steps the government 
could take to support economic growth and FDI flows, but when 
the foreign firms provided concrete suggestions to stimulate 
investment in the services sector, Yakcop responded with a 
long-winded answer on the difficulty involved that left 
little room for optimism. 
 
¶6. (SBU) Another senior AmCham board member and long-time 
resident/observer of the Malaysian economic and political 
scene, told the Ambassador that this was yet another example 
of the GOM demonstrating it was adept at snatching defeat 
from the jaws of victory.  The economic crisis provided an 
opportunity to move on reforms, but partly due to a lack of 
confidence and competence in government, leaders were failing 
to move.  While the political leadership transition was 
contributing to the lack of action, he said that Malaysia,s 
incremental approach to policy was ingrained and the 
leadership was simply not open to the large scale reform 
measures Malaysia needed to look ahead and reinvent itself to 
maintain competitiveness.  Malaysian leaders lacked the 
courage and vision to take big reforms.  In addition to the 
financial crisis, Malaysia faced an energy crisis and a 
fiscal crisis a few years down the road, but despite much 
discussion, the government had yet to devise policies to deal 
with these challenges.  This observer added that this 
inaction continued even though government leaders were aware 
that Malaysia,s position as a key site for electronics 
industry FDI was already mostly a thing of the past and that 
several important U.S. firms that had been mainstays in 
Malaysia had already pulled out. Speaking to this point, a 
country manager of a major U.S. oil services company said his 
firm would have done an expansion of its facility in Johor, 
but found the government too difficult, slow and cumbersome, 
and therefore redirected investment funds to Singapore. 
 
¶7. (SBU) According to a senior U.S. banker, Bank Negara 
Governor Zeti admitted the government,s public stance on the 
economy was overly positive but she asserted that the 
government was not unaware or in denial about the worsening 
condition of the economy.  She acknowledged that political 
leaders should be less optimistic in their public comments 
but she had no control over that.  In general, Zeti said, the 
government was trying to maintain a realistic framework by 
announcing downward revisions in the GDP growth forecast 
without becoming alarmist.  Citi said the bankers told Zeti 
the government was risking an unpleasant shock to the public 
when it became clear that the economy was doing much worse 
next year than the government is letting on. However, a 
senior Bank Negara official told Econcouns December 2 that 
the government felt strongly it had to manage carefully the 
flow of negative information to prevent self-fulfilling 
negative expectations or panics that could cause additional 
damage to the economy.  This official said Bank Negara,s 
in-house estimates for GDP growth for 2009 already had been 
 
KUALA LUMP 00001063  003 OF 003 
 
 
revised downward to 2.5 percent, and that the government was 
looking at all policy options, but fiscal and monetary tools, 
while somewhat helpful, could not fend off a slowdown brought 
on by declining global demand. 
 
KEITH