Identifier
Created
Classification
Origin
07KUALALUMPUR1106
2007-07-03 11:39:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kuala Lumpur
Cable title:  

Malaysia Economic Update June 2007

Tags:  ECON EFIN EINV MY 
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VZCZCXRO2199
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #1106/01 1841139
ZNR UUUUU ZZH
R 031139Z JUL 07
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 9593
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBY/AMEMBASSY CANBERRA 2356
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 1489
RUCNASE/ASEAN MEMBER COLLECTIVE
UNCLAS SECTION 01 OF 02 KUALA LUMPUR 001106 

SIPDIS

CANBERRA FOR MATTHEWS
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, SENSITIVE
E.O. 12958: N/A
TAGS: ECON EFIN EINV MY
SUBJECT: Malaysia Economic Update June 2007


UNCLAS SECTION 01 OF 02 KUALA LUMPUR 001106

SIPDIS

CANBERRA FOR MATTHEWS
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, SENSITIVE
E.O. 12958: N/A
TAGS: ECON EFIN EINV MY
SUBJECT: Malaysia Economic Update June 2007



1. (U) Summary:

- Malaysian Cabinet approves Intellectual
Property Courts

- New Islamic Bond thirteen times oversubscribed

- Oil palm prices more than double in past two
years

- KL Mayor blames "uncontrolled development" for
flash flood damages.

End Summary.


--------------
Greenlight for Intellectual Property Courts
--------------


2. (U) The Cabinet recently approved Intellectual Property (IP)
courts to be set up in all states, according to press reports.
Fifteen Sessions Courts will handle criminal intellectual property
cases. In addition, the Federal Territory of Kuala Lumpur and the
five states with the highest rate of IP infractions -- Selangor,
Johor, Perak, Sabah and Sarawak -- each will have one of their High
Courts "specially designated" for IP cases. The courts will handle
cases under the Trade Description Act 1972, Patent Act 1983,
Copyright Act 1987, and Optical Disc Act 2000.


3. (U) Minister of Domestic Trade and Consumer Affairs Shafie Apdal
told the press that, as of June 30, the magistrate court had a
backlog of 515 IP-related cases, while the Sessions Court's backlog
was 1,030 cases. One local law firm told Econoff that IP cases
generally take five to eight years, with more complex patent
infringement cases taking ten to fifteen years.


4. (SBU) Comment: In April, USTR announced that Malaysia would
remain on the Special 301 Watch List this year. Since then, senior
Malaysian officials have approached us repeatedly to ask what would
be required to improve their ranking. The GOM undoubtedly will
expect that the new courts will be taken into account when their 301
status comes up for review.

--------------
Overwhelming Demand for New Islamic Bond
--------------


5. (U) On June 27, Malaysia's state-owned investment fund Khazanah
Nasional issued $850 million worth of convertible sukuk, an Islamic
bond that can be exchanged for shares of PLUS Expressways,

Malaysia's toll road operator. It offers a fixed 2% "periodic
payment" (coupon). Khazanah and its three book runners CIMB,
Deutsche Bank and JPMorgan spent 4 days traveling the Middle East on
a road show to promote the sukuk among investors there. When
Khazanah opened the bookbuilding, it was oversubscribed 13 times.
The huge demand prompted Khazanah to increase the offer by 42% to
$850 million from the original $600 million. Investors from the
Middle East purchased 50% of the offer.


6. (U) Khazanah owns 66% of PLUS Expressways. If fully exchanged,
the bond issue will account for 15% of the company.


7. (U) This is only the second Sharia-compliant convertible bond
offered by an Asian issuer. Malaysia's first sukuk, issued in
September 2006, was convertible into the national telecommunication
company, Telekom Malaysia. It offered 1.25% periodic payments.



8. (U) The yield to maturity (or "yield to scheduled dissolution"
in Islamic terms) was fixed at 90 basis points below the five year
US dollar swap rate, giving it a yield of 4.58%.


9. (U) A sukuk avoids paying interest, forbidden under the rules of
Islamic finance, by creating a dividend-based fund from which
periodic payments are made at a fixed rate, in this case 2%. The
periodic payments are not guaranteed. PLUS Expressways currently
plays a dividend of approximately 4%. The balance will be put into
a sinking fund for future annual payments to the bond holders.

--------------
KL Flash Floods Cost Millions

KUALA LUMP 00001106 002 OF 002


--------------


10. (U) Kuala Lumpur-Selangor Indian Chamber of Commerce Vice
President Ramesh Kadammal estimated in a television interview that
damage from flash floods that hit downtown Kuala Lumpur on June 10
amounted to RM 50 million (about US$ 15 million). Particularly hard
hit were the small businesses of the "Little India" and nearby Dang
Wangi shopping districts in Kuala Lumpur, where trash clogged the
area's already insufficient drainage system. Kadammel said several
shop owners had written to Kuala Lumpur City Hall requesting
compensation, but had not received a response. ECON FSN visited the
area nearly a week later to find that some shopkeepers were still
cleaning up.

--------------
What Went Wrong?
--------------


11. (U) In another televised interview, Kuala Lumpur Mayor Hakim
blamed "uncontrolled development" both within the city limits and in
the surrounding suburbs for the severity of the flooding. He said
erosion had decreased the depth of the Klang River that runs through
the center of KL. A TV journalist-environmentalist Dr. Karam
pointed out that fewer green areas in and around the city resulted
in larger volumes of runoff, and that current laws requiring
monitoring and environmental protection have not been effective. He
called for an integrated approach to city planning, saying the
Departments of Drainage and Irrigation, Meteorology, and Public
Works must work together with local councils and be held
accountable.

-------------- ---
"Smart" Tunnel: Will it be as Smart as it Looks?
-------------- ---


12. (U) Drainage and Irrigation Department Director General Keizrul
predicted the RM 2.1 billion (US$ 618 million) "Smart Tunnel" will
solve part of the city's storm drainage problems. The new
three-level tunnel under one of KL's most congested highways uses
the bottom level for storm water drainage, directing runoff into
retention ponds before dispersing it into rivers downstream of the
center of town. The upper levels of the Smart Tunnel opened for auto
traffic May 1; however, the bottom level was not operative in time
to assist with the June 10 flash floods. The Smart Tunnel has yet
to be put to the test.

--------------
Palm Oil Price Reaches Record High
--------------


13. (U) Malaysian oil palm plantation owners and investors are a
happy group these days as palm oil prices continue to rise. Crude
palm oil prices averaged between RM 2,300 (US$ 667) and RM 2,450
(US$ 710) per metric ton over the past several months reaching a
peak of RM 2,700 (US$ 782) in June. Average crude palm oil prices
were RM893 (US$ 235) per metric ton in 2001 and RM 1,389 (US$ 365)
in 2005. Analysts estimate the current cost of production of palm
oil to be about RM 800 (US$ 232) per metric ton. Ignoring
processing and marketing costs, this suggests a gross profit margin
of over 200%.


14. Malaysia currently is the world's largest palm oil producer,
but Indonesia, a close second, continues to convert more and more
land to oil palm plantations. Many Malaysian plantation companies
are participating in the Indonesian expansion. Palm oil and palm
oil-based products represent about 5.8% of Malaysia's total export
earnings. The U.S. was the fourth largest buyer of Malaysia's palm
oil in 2006 (up from tenth place in 2003) after the U.S. Government
mandated display of saturated fat or trans fat levels on nutritional
labels in January 2006. China is Malaysia's largest palm oil
customer, buying nearly a fifth of Malaysia's palm oil exports every
year.