VZCZCXRO9073
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #1404/01 2600906
ZNR UUUUU ZZH
R 170906Z SEP 07
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 9966
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 1505
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 001404 
 
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:  PM Launches Northern Corridor Economic Region; Malaysia 
Promotes Islamic Reinsurance:  Economic Update for August 2007 
 
REF:  KUALA LUMPUR 1005 
 
¶1.  Summary: 
 
-  Prime Minister Abdullah launched a new economic development 
corridor, the Northern Corridor Economic Region (NCER), which aims 
to bolster the economic competitiveness of Perlis, Kedah, Penang, 
and Perak states and reduce the imbalance in regional economic 
growth rates. 
 
- Malaysia's central bank invited qualified local and foreign 
players to make Malaysia the center for their "retakaful" 
(reinsurance under Islamic principles) business activities. 
 
-  The stock market regained lost ground as turmoil in the global 
credit markets eased. 
 
-  Inflation rose to 1.6% in July after a low of 1.4% year-on-year 
in both May and June, but remains in the central bank's target 
range. 
 
End Summary. 
 
Northern Corridor Economic Region 
-------------------------------------------- 
 
¶2.   On July 30, Prime Minister Abdullah Ahmad Badawi launched the 
Northern Corridor Economic Region (NCER), exactly one year after the 
GOM launched its first such economic corridor project, the Iskandar 
Development Region, in Johor state on the border with Singapore 
(Reftel).  The GOM hopes the NCER, which includes the states of 
Perlis, Kedah (Abdullah's home town), Penang, and Perak in 
northwestern Peninsular Malaysia near Thailand, will accelerate 
growth and increase income levels in the region.  NCER is one of 
four mega economic corridors identified in the Ninth Malaysia Plan 
(2006-2010) that the GOM hopes will become key engines of economic 
growth for the country. The GOM expects the NCER initiative to 
generate RM 177 billion (USD 50.5 billion) in project spending 
between 2007 and 2025, with one third of this coming from government 
projects and the balance from the private sector. 
 
¶3.  Abdullah hopes to promote balanced economic development across 
different regions by encouraging higher value added, knowledge 
intensive industries to locate there.  Sime Darby Bhd, a government 
link company (GLC) conglomerate with core businesses in the 
automotive, property and plantation sectors, drew up the master plan 
for the project and will serve as the overall coordinator. The GOM 
also plans to establish a Northern Corridor Implementation Agency 
(NCIA) to help implement the project and serve as a "one stop" 
center for investor support.  The NCIA will be tabled in Parliament 
in the second quarter of next year. 
 
¶4.  EconOff and EconFSN were briefed by Sime Darby officials on the 
NCER blueprint.  According to Energy and Utilities Divisional 
Director Mohamad Shukri Baharom, there will no duplication of 
industries within the NCER so that each state can enjoy its share of 
income activities.  Shukri said NCER objectives include maximizing 
economic potential in the existing industries, closing income gaps, 
and moving Malaysia's economy towards higher value added, knowledge 
based industries. 
 
¶5.  Shurri added that NCER will focus on transforming and expanding 
the agricultural, manufacturing, tourism and logistics sectors in 
the region, with the government playing a strong supporting role and 
the private sector taking the lead.  He said government grants will 
be given to companies in industries that require continuous 
upgrading in human capital through training and industrial 
attachments.  Through this, the GOM hopes to develop human capital 
while retaining and attracting new investments in accordance with 
market needs. 
 
Agriculture 
-------------- 
 
¶6.  Shukri elaborated that the northern states are known for their 
agricultural activities, especially paddy farming, and that the GOM 
is planning to transform and expand the region's agricultural sector 
into a "food zone" by improving efficiency in food production and 
encouraging more downstream food processing.  Shuri said Sime Darby 
will build a research center to develop seed cultivation and 
production in Perlis in collaboration with a Chinese company which 
will help reduce Malaysia's dependence on imported seed. 
 
 
KUALA LUMP 00001404  002 OF 002 
 
 
Manufacturing 
------------------ 
 
¶7.  The NCER is also home to much of Malaysia's electrical and 
electronics (E&E) sector, which is based mainly in Penang, Kulim, 
and Kedah.  The E&E sector accounted for 47.7 percent of Malaysia's 
manufacturing sector exports in 2006, and the GOM aims to move this 
sector towards higher value added products and services through 
greater emphasis on design and R&D.  The GOM also hopes to transform 
Penang into a major logistics and transportation hub which will 
serve as the gateway for the NCER. 
 
Tourism 
---------- 
 
¶8.  Another key focus area for the NCER is tourism, which is 
Malaysia's second largest foreign exchange contributor after 
manufacturing contributing 5.5 percent to Malaysia GDP in 2005. 
Under the NCER initiative the GOM hopes to encourage more foreigners 
to come to Penang for medical tourism (including cosmetic and 
elective surgeries) and then recuperate in the high end resorts of 
neighboring Langkawi. 
 
Malaysia Promotes Islamic Reinsurance 
--------------------------------------------- --- 
 
¶9.  On August 29 Bank Negara Deputy Governor Zamani Abdul Ghani 
invited qualified local and foreign players to apply for licenses to 
provide "retakaful" (reinsurance under Islamic principles) services 
in Malaysia and to make Malaysia their center for retakaful 
activities.  New retakaful operators will be given flexibility to 
conduct business in the country as a corporation, branch office, or 
joint venture with a Malaysian company.  Zamani said the move would 
complement the country's "takaful" (insurance under Islamic 
principles) industry, which has been growing at a rapid pace, and 
added the new retakaful licensees would help reduce the Malaysian 
takaful industry's dependence on conventional reinsurance products. 
In the first half of this year net "contributions" (premiums) to the 
takaful industry in Malaysia were RM 1.3 billion (USD 371 million), 
up 36% from a year ago. 
 
Stock Market Rebounds 
----------------------------- 
 
¶10.  After slipping to a low of 1148 on August 17, the Kuala Lumpur 
composite index (KLCI) regained lost ground to close 11.1% higher at 
1273.93 on August 30 in line with the improved performances of the 
regional and U.S. bourses.  Although more than 80% of corporations 
here reported improved earnings in the second quarter, the KLCI has 
fluctuated wildly along with the ups and downs of the Dow Jones 
index on credit concerns in the U.S.  Malaysian banks clarified they 
have no exposure to the investment products linked to the U.S. 
subprime market.  Malaysia's lead bank, Maybank Bhd., is the only 
Malaysian bank reported to have indirect exposure to the subprime 
market in the amount USD 95 million.  Maybank reported a 28% higher 
profit of RM 1.08 billion (USD 308 million) for the quarter ended 
June 2007.  Malaysian investment bank CIMB expected the Malaysian 
stock market to regain investors' favor once the sunprime dust 
settles.  As of August 30, the KLCI was up 16.2% for 2007. 
 
¶11.   Second Finance Minister Nor Mohamed Yakcop said Malaysia's 
economic policies should have enough "in-built" flexibility to 
overcome the concerns over the U.S. subprime problems.  He said 
Malaysia has always been flexible and creative in the management of 
the economy.  He commented that the current downturn in Wall Street 
was likely a correction in a bull market and not the emergence of a 
bear market. 
 
Inflation Rises in July 
-------------------------- 
 
¶12.  Malaysia's consumer price index (CPI), a measure of the 
country's inflation rate, rose 1.6% to 105.7 in July year-on-year 
after a low of 1.4% year-on-year in both May and June.  For the 
period January to July, the CPI increased 2% from the same period in 
¶2006.  Analysts had projected a lower inflation of 1.4% for July. 
They attributed the marginally higher inflation to the filtering 
effect of government employees' salary hike and the increase in 
excise duty of cigarettes starting July.  Bank Negara expects 
overall inflation for all of 2007 to register between 2% and 2.5%. 
 
SHEAR