VZCZCXRO6415
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHPB
DE RUEHKL #0380/01 1380047
ZNR UUUUU ZZH
P 180047Z MAY 09
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC PRIORITY 2731
INFO RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEHKA/AMEMBASSY DHAKA 0436
RUEHNE/AMEMBASSY NEW DELHI 0895
RUEHCG/AMCONSUL CHENNAI 0140
RUEHCI/AMCONSUL KOLKATA 0045
RUEHBI/AMCONSUL MUMBAI 0126
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGV/USMISSION GENEVA 1720

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 000380 
 
SENSITIVE 
SIPDIS 
 
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 USTR 
 
E.O. 12958: N/A 
TAGS: EFIN ECON IEINV ETRD PREL PGOV MY
SUBJECT: MALAYSIA: ECONOMIC PROSPECTS AND FINANCIAL SECTOR 
 
REFORMS 
 
REF: A. KUALA LUMPUR 195 
     ¶B. KUALA LUMPUR 318 
     ¶C. BEIJING 1267 
 
KUALA LUMP 00000380  001.2 OF 002 
 
 
 ¶1.  (U) Summary and comment:  Central Bank Deputy Governor 
Ooi Sang Kuang reports that Malaysia is seeing signs of a 
U-shaped recovery with positive growth in the fourth quarter 
of 2009.  Ooi credits GOM monetary and fiscal policy (Ref A) 
as well as financial sector liberalizations (Ref B) for the 
brighter prospects.   New licenses for foreign banks promised 
as part of the financial sector liberalization plan announced 
by the PM April 27 (reftel) will be granted to those banks 
that can fill a "gap" in the Malaysian financial sector and 
"increase linkages" with other economies.  Beginning in 2010, 
banks with offshore operations will be permitted to apply for 
onshore operations in Malaysia, subject to criteria that are 
still being developed. 
 
¶2. (SBU) Comment:  While the GOM has made clear that the new 
banking licenses will be a matter of negotiation, the fact 
that Malaysia is opening up to foreign banking after being 
closed for decades is a significant step forward.  Looking 
ahead, the Central Bank is developing its new ten-year 
"Financial Sector Master Plan" which likely will involve slow 
but steady liberalization of the tightly-controlled sector. 
End summary and comment. 
 
 
RECESSION AND RECOVERY:  VIKING SHIP OR U-SHAPE? 
 
¶3. (U) On May 12, Econcouns met with Central Bank Deputy 
Governor Ooi Sang Kuang to discuss the state of the Malaysian 
economy and the recent financial sector liberalization 
package.  Ooi expressed optimism that Asian economies were 
springing "green shoots" of new life, citing Malaysia's 
positive month-on-month export figures as evidence.  While 
year-on-year exports remained down, Ooi hopes the external 
sector has hit bottom this month.  "China has turned around," 
Ooi said, pointing to improved month-on-month trade figures 
for Taiwan, Korea, and mainland China to underline his hope 
that demand in China would pull the rest of Asia out of 
recession. (Note:  China posted positive month-on-month 
export figures for April, although year-on-year figures 
remain down (Ref C).  End note.) 
 
 
CONTRIBUTORS TO RECOVERY:  MONETARY AND FISCAL POLICY 
 
¶4. (U) Ooi was optimistic that Malaysia would see a 
turnaround by the fourth quarter.  He expected growth in the 
first quarter to be negative, the second quarter to remain 
negative but less so, with "stabilization" in the third 
quarter and positive growth in the fourth.  Malaysia's 
"front-loaded" monetary policy with early, successive 
interest rate cuts was effective, he explained.  He credited 
the government's fiscal stimulus package for sustaining 
domestic demand; forecasting that most of the spending would 
"hit the ground" in the third quarter.  Ooi also observed 
that lower- and middle-income groups in Malaysia seemed to be 
spending as usual.  "Malls are still seeing heavy traffic," 
he said, explaining that "only the very high end" of the 
income ladder was affected significantly by the economic 
crisis.  Electronics manufacturing, the mainstay of 
Malaysia's export market, had already seen the bottom, he 
explained.  While December and January had seen a dropoff in 
production, suppliers had been shrinking their inventories 
and now orders were coming back.  "Instead of the Viking-ship 
shaped recession we had feared, we might have a U-shaped 
recovery." 
 
 
LONG-TERM GROWTH WOULD DEPEND ON LIBERALIZATION 
 
¶5. (U) Ooi explained that the third strategy to prod economic 
 
KUALA LUMP 00000380  002.2 OF 002 
 
 
recovery ) liberalizations in the services sector -- would 
be the longer-term measures needed to help Malaysia move from 
a middle-income, manufacturing-based economy to a 
higher-income, knowledge-based one.  The financial sector 
liberalization announced on April 27 is aimed at "filling 
gaps" in Malaysia's bid to become a global financial center 
and a fully developed country.  The Islamic banking licenses 
to be handed out would be for international business; they 
would not compete with the domestic Islamic banking sector. 
Likewise, the conventional banking licenses would be targeted 
to fill "gaps" such as agro-financing or microfinance.  A 
number of foreign banks were lining up to apply for licenses. 
  "Whatever they can put on the table will make them more 
competitive," Ooi stated.  He further explained that the 
liberalization would allow foreign banks to open up to ten 
"microfinance" branches from which business loan amounts 
would be capped at RM 50,000 (USD 14,000).  He pointed to 
Indonesia and Bangladesh as sources of "very profitable" 
microfinance operations. 
 
¶6. (U) Ooi noted that the GOM wanted Malaysian banks to 
expand throughout the region to assist Malaysian companies 
also expanding abroad.  He pointed out that some Malaysian 
companies had secured contracts for major infrastructure 
projects in India, but there were no Malaysian banks there. 
Separately Nazir Razak, brother of Prime Minister Najib Razak 
and CEO of Malaysia's CIMB Bank Group, told the press, "We 
hope to take advantage of some reciprocity as we go abroad." 
 
¶7.  (U) Central Bank Governor Zeti Akhtar Aziz also told the 
press that the entry of the new players would "be dependent 
on the value propositions" they bring to the Malaysian 
system, "to bring world-class products and services to 
enhance our linkages and so on."  On May 13 Zeti told Econoff 
that new rules allowing offshore banks to apply for onshore 
licenses would be subject to similar "criteria"; while it 
"would be premature to comment on what those criteria will 
be," she explained, "the main point is that it would not be 
automatic."  Onshore licensing would "depend on the bank's 
business plan," namely, what the onshore operation would 
contribute to the development of Malaysia's economy, 
especially its financial sector. 
 
 
LOOKING AHEAD 
 
¶8. (U) Malaysia's central bank is developing a new Financial 
Sector Master Plan to follow the current ten-year plan 
scheduled to end in 2010.  Although Ooi did not share 
details, he explained that the main thrust will be to 
facilitate Malaysian transformation from a 
manufacturing-based to a services-based economy.  Lending 
would be different, he said; for example, assessing the 
viability of a services start-up was more complex than that 
of bricks and mortar.  Malaysia's educational system also 
would need to be improved to meet the needs of a 
knowledge-based society.  As a start, banks and insurance 
companies no longer had limits on the number of expatriates 
they could employ.  While the GOM encourages the hiring of 
locals, especially ethnic Malays, it would take time for 
enough Malaysian professionals to meet the current needs of 
companies. 
KEITH