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RR RUEHBC RUEHCHI RUEHDA RUEHDE RUEHDT RUEHFK RUEHGI RUEHHM RUEHJS
RUEHKSO RUEHKUK RUEHLH RUEHNAG RUEHNH RUEHPB RUEHPW RUEHROV
DE RUEHKL #1080/01 3492346
ZNR UUUUU ZZH
R 142346Z DEC 08
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 2115
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHGV/USMISSION GENEVA 1647
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHZU/APEC MEMBER COLLECTIVE
RUCNISL/ISLAMIC COLLECTIVE
RUEHNE/AMEMBASSY NEW DELHI 0846

UNCLAS SECTION 01 OF 04 KUALA LUMPUR 001080 
 
STATE PASS USTR - WEISEL AND BELL 
STATE PASS FEDERAL RESERVE AND EXIMBANK 
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN 
SINGAPORE PASS TO SBAKER 
USDOC FOR 4430/MAC/EAP/M.HOGGE 
TREASURY FOR OASIA AND IRS 
GENEVA FOR USTR 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON ETRD PGOV MY
SUBJECT: MALAYSIAN GROWTH DECLINING DESPITE IMPLEMENTATION OF 
SUPPORTIVE POLICY MEASURES 
 
¶1. (SBU) SUMMARY: Malaysian government and private sector analysts 
expressed pessimism about the performance of the Malaysian economy 
in 2009 during meetings with visiting Treasury Attache Susan Baker 
and Econcouns.  Although banks are well capitalized, a sharp decline 
in demand for Malaysia's manufactured exports and a sharper decline 
in the price of its export commodities are taking a toll on growth. 
Moreover, the government's RM 7 billion (USD 2 billion) fiscal 
stimulus package is viewed as unlikely to reverse the downward 
trend.  With 40 percent of federal revenues dependent on Petronas, 
the national oil company, low oil prices coupled with declining 
production could force Malaysia's government to address its 
ballooning fiscal deficit in 2010.  Ministry of Finance officials 
report that a goods and services tax (value-added tax) is "ready" to 
address this revenue shortfall; however, the political will to 
implement it is lacking.  One private banker predicted that Bank 
Negara would cut interest rates by another 50 basis points during 
the first quarter of 2009 to cushion the economic downturn, but 
officials at Bank Negara warned that there were limits to what 
monetary and fiscal stimulus could do to address Malaysia's longer 
term structural problems. Bank Negara dismissed the idea that it 
used currency policy inappropriately.  End summary. 
 
¶2. (SBU) COMMENT:  Malaysia is reaching the limit of what its own 
policies can do to support the economy in the short run:  in 
monetary policy, rates are already low in absolute terms and 
negative in real terms, and in fiscal policy, much more spending 
risks a downgrade of their sovereign credit ratings.  More and more, 
the GoM must be squaring up to reality that they need major 
structural reforms in several areas to end the system of racial 
preferences, strengthen the tax base, improve the education system 
and spur the private (rather than public) sector investment that 
would improve the economy's long term growth potential. End 
comment. 
 
PROSPECTS FOR THE MALAYSIAN ECONOMY 
 
¶3. (SBU) Bank Negara's Director of Monetary Assessment and Strategy 
Dr. Sukhdave Singh (protect) told Baker and Econcouns he was 
privately not upbeat about the prospects for the Malaysian economy: 
exports were down, commodity prices were way down, and manufacturing 
companies were looking at layoffs, he said.  He hoped employers 
would cut wages or give time off first because consumers would be 
more confident and ready to spend if they remained employed. 
(Comment: Considering Malaysia's relatively high consumer 
indebtedness levels, a sharp rise in unemployment could have serious 
negative ramifications for many banks. End Comment) 
 
¶4. (SBU) Sukhdave lamented that Malaysia's capacity to deal with the 
global crisis was limited.   While Malaysian banks were well 
capitalized and in good shape, interest rates had been low for some 
time, and now there was very little room to lower them further in an 
effort to stimulate the economy.  He hoped the RM 7 billion fiscal 
stimulus plan would halt the downward spiral but said it would take 
time before corporate balance sheets recovered.  Meanwhile, 
consumers were over their heads in mortgages, manufacturing was 
experiencing negative growth, and demand for loans from small & 
medium-sized enterprises was down.  Auto sales were holding up but 
it was only a matter of time before they would be hit as well.  He 
predicted that 2009 would be a bad year for Malaysia and across the 
region.  Analysts were no longer pointing to a recovery in the 
second half of 2009; rather, they were looking to 2010 -- even to 
the second half of 2010. 
 
¶5. (SBU) Malaysia would need to look at the global competitiveness 
of its economy, focusing on longer-term solutions, Sukhdave said. 
Savings rates remained high because Malaysia had an insufficient 
social safety net and because many Malaysians had lost faith in the 
country's educational system.  People saved for years to send their 
children to study overseas.  Transportation was another issue that 
needed to be addressed.  As a result, people spent a great deal to 
live closer to work; if the transportation infrastructure were 
better, this would not be necessary.  Malaysia needed to liberalize 
its economy and provide the right incentives to encourage 
investment.  Sukhdave hoped the pressure from the economic downturn 
would help politicians to realize the importance of enacting 
longer-term structural economic reforms. 
 
KUALA LUMP 00001080  002 OF 004 
 
 
 
¶6.  (SBU) He said the current downward pressure on the ringgit was a 
manifestation of a widespread "flight to safety" which would unwind 
as soon as the global economy began to show signs of recovery. 
Malaysia, he added, was not trying to depreciate its way out of the 
economic crisis.  He said the ringgit was widely expected to 
appreciate and had experienced huge portfolio flows during the first 
quarter of 2008.  Since then, the trend had reversed. 
 
¶7. (SBU) Sukhdave asserted that, as an open trading nation, Malaysia 
needed to maintain a high level of foreign exchange reserves in its 
current account as a safety buffer.  He divided the current account 
into two parts:  a more reliable "core" amount derived from 
trade-based transactions and a "short-term" amount derived from 
portfolio flows, which could not be counted as part of a safety 
buffer because speculators were likely to pull these types of funds 
out of the country at the first sign of a downturn.  Bank Negara 
tracked where transactions came from and where they were going - 
whether for foreign direct investment, for the stock market, or 
elsewhere, he said.  Bank Negara intervened to mitigate extreme 
volatility related to short-term flows, which sometimes amounted to 
billions of ringgit in a month only to reverse the following month. 
Sukhdave insisted that Bank Negara's interventions touched upon 
neither the "core" current account funds nor the long-term 
fundamentals of the Malaysian economy.  Within Bank Negara, they did 
not discuss exchange rates as a tool to increase the competitiveness 
of Malayia's exports, noting that in the current downturn in global 
demand, such efforts would, in any case, be useless. 
 
MALAYSIA'S STIMULUS PLAN 
 
¶8. (SBU) Like Sukhdave, Datuk Puan Latifah, Deputy Secretary General 
for Policy at the Ministry of Finance, acknowledged to Baker and 
Econcouns that reduced exports would deal a painful blow to the 
Malaysian economy going forward, but saw that as the local economy's 
"only problem." 
 
¶9. (SBU) Latifah expressed confidence in the positive effects of 
Malaysia's economic stimulus package, which her office had drafted. 
The package would focus on infrastructure, training, and boosting 
domestic demand. The plan includes RM 1.5 billion (USD 428 million) 
to establish an investment fund to attract private investment, RM 
1.2 billion (USD 343 million) for low and medium cost housing, and 
money for public transportation, roads, schools, hospitals, police 
stations and quarters, broadband, skills training, business premises 
for SMEs, education, and maintenance projects. 
 
¶10. (SBU) Policy initiatives in the fiscal stimulus plan include a 
promise to "re-prioritize" government projects, develop 
government-owned land (much of which has been occupied by low-income 
"squatters" since at least the 1950s), allow employees to reduce 
mandatory retirement savings, and order shopping malls and 
hypermarkets to extend their operating hours.  Import duties on 
cement have been abolished; duties on iron, steel and other 
construction materials have been reduced. 
 
OIL REVENUE DECLINING BUT VAT TAX READY TO GO 
 
¶11. (SBU) Latifah acknowledged that the GOM received approximately 
40 percent of its federal revenue from Petronas, the national oil 
company, and that Malaysia was projected to become a net importer of 
oil over the next several years.  In addition, the 2009 budget was 
developed based on an assumed average oil price of $125 per barrel 
for 2008.  (Note:  Petronas' 2008 profits determine their 2009 
contribution to federal coffers. End note.) Therefore, the 2009 
fiscal deficit would be larger than projected due to the unforeseen 
plummet from a high oil price of $147 to less than $47 per barrel. 
The average price of oil from January through November 2008 remained 
above $100, she said, so fiscal impacts in 2009 would be limited. 
However, if oil prices remain low in 2009, the GOM would face a 
significant reduction in its 2010 revenue. 
 
¶12. (SBU) A Goods and Services Tax (GST, a value-added tax) was 
ready to go, Latifah explained, to deal with this impending problem. 
 The plans were complete, simulations had been run - only the 
political will to implement it was lacking.  She pointed out that 
 
KUALA LUMP 00001080  003 OF 004 
 
 
the middle of a global economic crisis was not an ideal time to 
implement a new tax, but she did not rule out the possibility of 
rolling it out in 2010. 
 
BANKERS' OUTLOOK GLUM 
 
¶13. (SBU) Suhaimi Ilas, Vice President & Chief Economist for Equity 
Markets at Aseambankers Malaysia Berhad, said Malaysia was "feeling 
the heat" of the global economic slowdown.  His forecast for 2009 
growth is 2.5 percent, compared to the government official forecast 
of 3.5 percent. Manufacturers were shortening working hours and 
mandating unpaid leave over Christmas and in some cases until the 
second week of January.  Chinese New Year holidays would further 
reduce January-February manufacturing figures.  The Federation of 
Malaysian Manufacturers was warning of a contraction in 2009, 
particularly in the electrical and electronics industry. 
 
¶14. (SBU) Suhaimi said Bank Negara was likely to cut interest rates 
by another 50 basis points in the first quarter, but that the RM 7 
billion stimulus plan (worth an estimate 1 percent of GDP) was 
insufficient to make much of an impact on the economy as a whole. He 
expressed concern about the lack of transparency surrounding the 
large share of the stimulus program being channeled into the 
government-owned asset manager Value Cap.  Finally, he noted that 
none of the fiscal plans so far had done anything to address 
Malaysia's underlying problem of a low share of private investment. 
He did not expect that a GST would be implemented before 2011.  Even 
if the economy revived in 2010, the GOM would need to inform 
businesses in advance of implementing a new tax. 
 
¶15. (SBU) He predicted loan growth to slow to low single digit 
growth 2009, with banks cutting more on consumer lending.  He had 
not seen a shortage of trade financing or other business lending. 
He said low-income Malaysians tended to be highly indebted, often 
qualifying for loans based on overtime pay which was drying up. 
Suhaimi noted that Malaysia's current account balance would fall, 
due to a sharp fall in exports and weaker remittances from overseas 
workers (for example, from financial sector workers in Singapore.) 
However, he expected imports would drop dramatically as well, since 
70-75 percent of Malaysian imports were intermediate goods 
reprocessed into exports.  He did not think that the recent 
weakening in the ringgit was due to current account performance, but 
rather reflected the fact that real (inflation-adjusted) interest 
rates were sharply negative. 
 
¶16. (SBU) In a subsequent meeting with Baker and Econoff, Stephen 
Hagger (protect), Managing Director for Asian Equities at Credit 
Suisse, agreed that the outlook for Malaysia was grim.  He expressed 
faint hope but little expectation that the current economic 
pressures would lead to economic reforms.  He said Deputy Prime 
Minister Najib had asked him in a recent meeting what Malaysia's top 
economic priorities should be; Hagger had responded that the racial 
preference policies under the New Economic Policy (NEP) needed to be 
sunsetted and Malaysia needed to improve its educational system.  He 
said that there was a keen understanding among policymakers of the 
need to reform; however, vested interests made reform difficult. 
 
¶17.  (SBU) Ambank corporate finance officials also noted that 
financial markets essentially had shut down.  There were no new IPOs 
in the pipeline.  Since the government attempted to impose a 
windfall profit tax on electricity companies (reftel), bond 
issuances, including Islamic bond issuances, had disappeared. 
Interest in private equity deals also had dried up.  Only a few 
companies, such as electricity producer YTL and resorts company 
Genting, were expanding investments and doing deals, and these were 
generally funded from resources already on hand at those companies. 
 
 
GOVERNMENT MUST LOOSEN ITS GRIP, SAYS OFFICIAL 
 
¶18. (SBU) Dr. Noor Azlan Ghazali (protect), Director of the 
Malaysian Development Institute within the Economic Planning Unit, 
which is part of the Prime Minister's Department, told Baker and 
Econoff that if Malaysia wanted to become a developed nation by 2020 
it would have to "loosen the grip of government control."  The GOM 
had a "long experience of controlling" the economy, Noor said, and 
 
KUALA LUMP 00001080  004 OF 004 
 
 
liberalization would have to come in stages as market 
infrastructures were developed.  Noor highlighted Malaysia's lack of 
price flexibility as evidence that the market was not working 
properly.  Noor felt strongly that Malaysia needed an anti-trust law 
to promote competition, which would aid in price flexibility as 
well. 
 
¶19. (U) This cable has been cleared by Susan Baker, Treasury 
Attache, Singapore.