VZCZCXRO9655
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #0592/01 0890723
ZNR UUUUU ZZH
R 300723Z MAR 07
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 8884
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 1474
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 000592 
 
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:  Government Pension Fund Buys 4th Largest Bank; "Mission 
2057" Launched:  Malaysia Economic Update for March 2007 
 
¶1. (U) Summary:  Malaysia's state pension fund was the winning 
bidder for the country's fourth largest banking group, prevailing 
over a competing bid that was significantly higher.  Critics claim 
the fund lacks the expertise to operate a commercial bank. 
Meanwhile, Malaysia's ruling political coalition announced "Mission 
2057", a plan to ensure the country's continued development after 
"Vision 2020", the country's current development goal of becoming a 
fully developed nation by the year 2020, is achieved.  End Summary. 
 
Pension Fund Buys Bank; Not the Highest Bidder 
--------------------------------------------- - 
 
¶2.  The Employees Provident Fund (EPF), Malaysia's state-owned 
pension fund, emerged as the winning bidder for control of Rashid 
Hussein Bhd (RHB), Malaysia's fourth largest financial services 
group, beating out competing bids from Kuwait Finance House 
(Malaysia) Bhd, a foreign Islamic banking group, and EON Capital 
Bhd, a smallish Malaysian banking group that owns EON Bank.  Utama 
Banking Group Bhd (UBG), RHB's major shareholder, accepted EPF's 
revised offer of RM 2.25 billion (USD 651 million) for its 32.8% 
stake in RHB on March 8.  The deal is subject to shareholder 
approval and regulatory approvals from the Ministry of Finance and 
Bank Negara. 
 
¶3.  UBG's move surprised investors because EPF's offer was 6% less 
than the RM 2.39 billion (USD 692 million) that EON Capital had 
offered for the same shares.  The acquisition will increase EPF's 
stake in RHB to 63.5% from its current 30.9% ownership.  RHB owns 
64.61% of RHB Capital Bhd, which in turn owns 70% of RHB Bank Bhd., 
a large commercial bank.  EPF plans to buy out the remaining 30% 
stake in RHB Bank from the GOM's investment arm, Khazanah Holdings, 
within the next three to four months for RM 3.2 billion (USD 914 
million).  If successful, EPF will have full control of RHB Bank. 
 
¶4.  EPF CEO Azlan Zainol said EPF's increased stake in RHB will 
protect the fund's existing interest in RHB and allow EPF to 
maximize its returns on capital.  EPF expects a return of 5% to 6% 
return on its investment in the first two years, in line with the 
fund's annual dividend policy of 5% over the next two years.  After 
the takeover, Azlan said EPF plans to de-list RHB from the Bursa but 
keep RHB Capital listed.  It would then dispose 35% of its stake in 
RHB Capital within two years to strategic partners, possibly foreign 
institutions, who would help EPF manage the bank. 
 
A Good Investment? 
------------------ 
 
¶5.   EPF's intention to take full control of RHB Bank has raised 
concerns.  Analysts are skeptical of EPF's ability to manage a 
commercial bank, noting that EPF has lost money before when trying 
to manage the Malaysia Building Society Bhd, a home mortgage 
institution, which nearly went bankrupt.  Others prefer to call 
EPF's acquisition a bailout because RHB is currently RM 3.6 billion 
(USD 1.03 billion) in debt and EPF's cash offer will effectively 
alleviate RHB's cash flow problems.  EPF is already the 
second-biggest shareholder in RHB, having initially invested in it 
during the Asian Financial Crisis in 1998 to rescue the bank from 
collapse. 
 
¶5.    The Democratic Action Party (DAP), Malaysia's largest 
opposition party, has come out strongly against the acquisition. In 
opinion pieces in the local press, Tony Pua, economic advisor to the 
DAP Secretary General, has argued that EPF has neither the 
experience nor the expertise to own and manage a commercial bank and 
that the acquisition will risk workers' retirement saving by having 
the pension fund bet heavily on a single large investment.  Pua said 
there is also the risk that EPF, acting as the owner of the bank, 
will be committed to pump in additional EPF funds to "rescue" the 
Bank in the event of another financial or banking crisis and that 
EPF management's attention will be diverted from their primary 
responsibilities of looking after workers' retirement savings to 
owning and managing a commercial bank. 
 
Mission Improbable? 
------------------- 
 
¶6.  Separately, the Supreme Council of Barisan Nasional (BN), the 
political coalition that has ruled Malaysia since 1973, announced 
that the country will embark on a new challenge, "Mission 2057", to 
ensure continued development and after "Vision 2020", Malaysia's 
current goal of becoming a fully developed country by the year 2020, 
had been achieved.  Prime Minister Abdullah Badawi said "Mission 
 
KUALA LUMP 00000592  002 OF 002 
 
 
2057" would become the development guideline for another 50 years. 
He added that in formulating this long-term mission the GOM wanted 
the people, including opposition parties, women, young people, 
professionals and NGOs, to discuss and provide views for the 
country's future.  "Fifty years is not that far off that we cannot 
see things ahead.  The mission will continue from where Vision 2020 
left off," he said. 
 
¶7.  Vision 2020 was introduced by former Prime Minister Mahathir 
Mohamad in 1991 during a period when Malaysia was experiencing rapid 
growth.  Since the Asian Financial Crisis, however, Malaysia has 
experienced much slower annual growth rates, causing some critics to 
doubt whether Vision 2020's goal of an economy eightfold stronger 
than Malaysia's economy of the early 1990s will be achieved in time. 
 Lim Kit Siang, a prominent leader of the DAP opposition party, said 
"it sounded a rather tall tale that the BN Supreme Council met 
yesterday to take the policy decision to formulate Mission 2057 when 
it is ... dubious that Vision 2020 [can] be achieved ..." He added 
that Mission 2057 gave "the impression that Vision 2020 is no longer 
important." 
SHEAR