VZCZCXRO5791
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #0187/01 0330520
ZNR UUUUU ZZH
R 020520Z FEB 07
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 8424
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 1459
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 000187 
 
SIPDIS 
 
STATE PASS USTR - WEISEL AND JENSEN 
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 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV MY
SUBJECT:  Bank Negara Relaxes Rules on Banks' Equity Investments; 
Johor Flooding Causes Major Losses:  Malaysia Economic Update for 
January 2007 
 
REF:  (A) Kuala Lumpur 006; (B) Kuala Lumpur 105 
 
¶1. (U) Summary:  Bank Negara has allowed banks greater freedom to 
invest in the stock market, while three more foreign financial 
institutions have entered the Malaysian market.  Meanwhile, the 
recent flooding in Johor is projected to cause at least RM 2.4 
billion (USD 686 million) in losses, although senior Malaysian 
officials maintain that the stimulus from reconstruction activities 
will offset the potential impact on economic growth.  End Summary. 
 
New Investment Policy Framework for Banks 
----------------------------------------- 
 
¶2. (U) Bank Negara relaxed its investment policy framework for 
financial institutions by giving banks greater flexibility with 
respect to their stock market investments.  Under the revised 
framework, which took effect on January 3rd, the limit on a bank's 
investment in stocks has been raised to 25% of its capital base from 
the existing 10%.  In addition, banks will be allowed greater 
flexibility in determining their internal policy governing their 
investments, including the types of equity investments they can make 
(now expanded to include to all listed shares, preference shares, 
unlisted shares and foreign equities) and the limits on exposure to 
a single company.  The regulations also permit banking institutions 
to take up to a 5% equity stake in another banking institution. 
 
¶3. (U) Bank Negara believes the new regulations will provide banks 
with greater flexibility in making investment decisions and help 
alleviate surplus liquidity resulting from a slowdown in loan 
growth.  Furthermore, with an additional RM 15 billion (USD 4.3 
billion) of funds available for investments in shares by the banks, 
the new measure are expected to give a shot in the arm to Malaysia's 
stock market.  The banking system's loan-deposit ratio eased 
markedly to 74% as growth in loans moderated to 6.3% while deposits 
rose 16.3% as of the end of December 2006.  As of mid-January, Bank 
Negara mopped up an estimated RM 206.5 billion (USD 59 billion) of 
excess liquidity in the banking system. 
 
3rd Foreign Islamic Bank Sets up Shop in Kuala Lumpur 
--------------------------------------------- ------- 
 
¶4. (U) Asian Finance Bank (AFB) of Qatar, one of the three foreign 
banks to have received an Islamic banking license from Bank Negara, 
started operations in Kuala Lumpur on January 9.  Qatar Islamic bank 
owns a 70% stake in AFB, RUSD Investment Bank Inc. of Saudi Arabia 
20% and Global Investment House of Kuwait 10%.  AFB CEO Faisal 
Alshowaikh said the bank would use Malaysia as a hub by expanding 
into neighboring countries and the region, and as a way to channel 
funds from the Middle East.  The bank has a paid-up capital of 
US$100 million and plans to add another 5 to 7 branches in major 
cities in Malaysia within the next two to five years.  Kuwait 
Finance House and Al Rajhi Bank of Saudi Arabia are the other two 
fully foreign owned Islamic banks in the country. 
 
Securities Commission Approves Nomura's Foreign Fund Manager License 
 
--------------------------------------------- -------- 
 
¶5. (U) Nomura Asset Management has become the second foreign fund 
manger granted a license to operate in Malaysia.  In a move to 
expand the growth of its capital market and encourage offshore 
investments, Malaysia announced in 2005 plans to offer licenses to 
five foreign asset management companies.  The government has granted 
a license to Aberdeen Asset Management Asia Ltd.  BNP Paribas Asset 
Management is expected to be the third recipient of a foreign fund 
manager license. 
 
Bank of Baroda Plans to Establish Kuala Lumpur Branch 
--------------------------------------------- -------- 
 
¶6. (U) Bank of Baroda, India's fifth largest bank, plans to set up a 
full fledged subsidiary in Malaysia (the bank currently has only a 
representative office in Kuala Lumpur).  Baroda chairman and 
managing director Dr. Anil Khandewal said the bank has sent an 
application to Bank Negara and is confident that it would be allowed 
to set up a branch by mid-2007.  Bank of Baroda's new branch in 
Kuala Lumpur is expected to be a joint venture between Bank of 
Baroda and two other Indian commercial banks, Bank of Maharasthra 
and Oriental Bank of Commerce.  [Comment:  Except for three foreign 
Islamic banks, Bank Negara has not permitted the entry of new 
foreign banks in the Malaysian market for the past several decades. 
 
KUALA LUMP 00000187  002 OF 003 
 
 
Bank Negara has in recent months, however, given increased 
flexibility to existing foreign banks in Malaysia by allowing them 
to establish between four to six new branches at approved locations. 
 End comment.] 
 
Flooding Causes Major Economic Losses for Johor 
--------------------------------------------- -- 
 
¶7. (U) A report by Alliance Research, the research arm of banking 
group Alliance, estimates that the flooding that occurred in the 
southern peninsular Malaysian state of Johor between December 19 and 
January 12 (Reftel B) will cause economic losses estimated at around 
RM 2.4 billion (USD 686 million), including cleanup and 
reconstruction.  The flooding dampened consumer spending in the 
commercial sector, depressed the property market, and disputed 
industries such as palm oil production, which will likely result in 
a rise in crude palm oil prices. 
 
¶8. (U) The Alliance Research report further predicted that Johor's 
mean monthly household income of RM 3,076 (USD 879) would also take 
a hit, possibly in the range of 10% to 15%, due to the loss of 
economic activity and productive man-hours.  On the other hand, the 
local construction and healthcare sectors are expected to receive a 
boost from the flooding, the former from rebuilding efforts already 
underway and the latter from flood induced disease control measures. 
 An official from the Malaysian Small Medium Industries Association 
(MSMIA) told EconFSN their members had suffered huge personal losses 
as a result of the flooding and had missed out on the yearend and 
pre-Chinese New Year shopping seasons.  MSMIA is appealing to the 
government to provide low interest loans to help members rebuild 
their businesses. 
 
Lack of Power; Major Infrastructure Damage 
------------------------------------------ 
 
¶9. (U) Officials say flood victims will have to cope without 
electricity for at least the next few months.  Tenaga Nasional, the 
national utility company, said a total of 788 electricity 
substations have been shut down as a result of the flooding and that 
some RM 10 million (USD 2.85 million) will be needed to repair the 
equipment.  The company promised to replace residences' power meters 
for free after the situation improves. 
 
¶10. (U) GOM officials estimate the damage to Johor's public 
infrastructure, such as roads, bridges and schools, at more than RM 
100 million (USD 28.5 million).  Damages to infrastructure related 
to other economic activities, such as plantations, manufacturing and 
services, have not yet been assessed by the government. 
 
¶11.  (U) Some senior officials are arguing that the stimulus to the 
construction industry from the rebuilding exercise will 
significantly offset the direct economic losses from the flood. 
Finance Minister II Nor Mohamad Yakcop told a visiting U.S. 
government official that he anticipates no slowdown in growth this 
year or next. 
 
The Rebuilding Begins 
--------------------- 
 
¶12. (U)  Repairing the public infrastructure is expected to begin 
just before the Chinese New Year celebrations on February 18 with an 
approved budget of RM 184 million (USD 52.5 million).  An economist 
from a securities house told EconFSN that it will take more than 
three months for most victims of the flood to rebuild their lives 
and get back to normal, while other analysts predict it will take 
between 10 to 15 months for the state to stage a full recovery.  The 
Johor state government said it will furnish displaced residents with 
low cost housing in the near future. 
 
¶13. (U) Prime Minister Abdullah Ahmad Badawi, who visited relief 
centers in the affected areas and spent time with the victims, 
directed government agencies to give out financial aid as quickly as 
possible.  He also called on financial institution to relax loan 
repayments schedules for farmers and other victims of the natural 
disaster.  The government has given children school books, uniforms 
and book bags to lighten the burden on those families who have lost 
everything in the flooding. 
 
¶14. (U) Johor officials are also taking steps to woo back visitors 
from neighboring Singapore.  The state is a popular destination for 
Singaporeans, who have invested heavily in high end property and 
 
KUALA LUMP 00000187  003 OF 003 
 
 
frequently travel back and forth to the state for shopping and 
dining.  During the bad weather, hotel occupancy rates declined 30%, 
severely affecting the employment of tour agents and guides. 
 
¶15. (U) As reported in Reftel B, the flooding in Johor, said to be 
the worst in the state in over 30 years, has claimed 17 lives and 
caused the evacuation of over 100,000 residents.  Kota Tinggi, the 
hardest hit town, was submerged under 1.5 meters of water after 
local rivers overflowed.  Several other cities were also affected, 
including Segamat and Johor Bharu. 
During the flooding Johor was at times reported to be completely 
inaccessible by road. 
 
LAFLEUR