Iran outdoes U.S. in FDI; Foreign Bank to Open in KL.

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E.O. 12958: N/A
TAGS: ECON EFIN EINV EPET MY
SUBJECT: Iran outdoes U.S. in FDI; Foreign Bank to Open in KL.
Malaysia Economic Update July 2007



1. (U) Summary: Malaysia's top investor for the first five months
of 2007 is Iran, due to a joint venture by the National Iranian Oil
Company (NIOC) and SKS Ventures Sdn. Bhd. to build a refinery in the
northern region of peninsular Malaysia. The Central Bank approved
another joint venture for Bank of Baroda and two other Indian banks,
marking the first new foreign conventional bank to be approved in
many years. Other developments include increased tourism, a flap
over pricing of the new Harry Potter book, and a slightly increased
forecast for economic growth. End Summary.

Malaysia's Top Investor Year-to-Date: IRAN
--------------


2. (U) Iran has emerged as the leading foreign investor in the
country for the period January through May 2007, at least in terms
of approved projects. Iran's new status is the result of a single
large refinery in which the National Iranian Oil Company (NIOC) has
a large stake. The refinery, which will be built in the northern
state of Kedah, is a joint venture with Malaysian company SKS
Development Sdn. Bhd., a sister-company to SKS Ventures which made
press earlier this year when it announced plans to develop the
Ferdows and Golshan gas fields in Iran. Both SKS Development and
SKS Ventures are owned by Malaysian tycoon Syed Mokhtar al-Bukhari.
The NIOC stake in the new refinery is reported to be less than 50%.


U.S. investment approvals drop to fifth place
--------------


3. (U) U.S. investment approvals are running in fifth place this
year, after a decade or more of the U.S. being Malaysia's top
foreign investor. According to the government investment approval
agency, Malaysian Industrial Development Authority (MIDA),Iran's
investment of USD 874 million, or 19% of total approved foreign
investment, is ahead of Netherlands (USD 653 million),Japan (USD
518 million),Singapore (USD 378 million) and the U.S. (USD 299
million). Average monthly approvals are up slightly for investment
from the U.S. and Japan and significantly for investment from the
Netherlands and Singapore. Total approved foreign investments were
USD 3.6 billion for the first five months of the year and USD 5.5
billion in 2006.


Comment
--------------


4. (SBU) It is too soon to tell whether the year-to-date project
approvals will lead to a significant increase in actual foreign
direct investment. Comparing the YTD monthly average for January
through May 2007 to the monthly average for 2006 shows a 57%
increase. This is hardly realistic. It is more likely that, with
national elections around the corner, the GOM is approving
everything that comes across the desk in an effort to boost the
figures. How many of these proposals ever break ground is yet to be
seen. However, the one large refinery jointly financed by NIOC and
SKS Ventures is expected to break ground within the next month or
two.


Foreign Conventional Bank Approved
--------------


5. (U) According to the GOM's "Financial Sector Master Plan,"
developed in 2001, this year was supposed to be the year that the
financial sector would be liberalized, after a series of
government-imposed clampdowns in the beginning of the 2001-2010
period covered by the plan. A series of gradual liberalizations
have been evident since January, and according to press reports, the
GOM recently approved the application of a new foreign conventional
bank - the first in many years. Bank of Baroda, India's fifth
largest lender, has been granted approval to set up a joint venture
with two other conventional Indian banks, Punjab National Bank and
Andhra Bank, in early 2008. Bank of Baroda currently has a
representative office in Kuala Lumpur which it opened in August

2004. Earlier press reports alluded to a long, complex series of
negotiations between Malaysia's central bank and Bank of Baroda.
This will be the first Indian bank permitted to open a branch in the
country, albeit a year later than planned. (Note: as part of
Malaysia's drive to become a global hub for Islamic finance, several
Middle East-based Islamic banks opened their doors in Malaysia
earlier this year.)


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Visit Malaysia Year 2007 and 50th Independence Day Celebrations
--------------


6. (U) The Visit Malaysia Year 2007 tourism campaign was launched
nationwide this year to celebrate Malaysia's 50 years of
independence from the British, which culminates with the Merdeka
National Day on August 31. Many activities and programs such as
cultural performances and street shows have been lined up to promote
Malaysia as a tourist destination both domestically and
internationally.


7. (U) The tourism industry continues to see increasing arrivals and
to contribute higher earnings to the Malaysian economy. A total of
17.55 million international tourists visited Malaysia in 2006 and
this year Malaysia is targeting 20.1 million tourists who are
expected to spend RM40.5 billion (approximately USD 11.8 billion).
As of March this year, Malaysia recorded 1.7 million visitors, an
increase of 10.9 percent compared to the same period last year.
Tourists from elsewhere in Southeast Asia usually make up the bulk
of arrivals to the country, including a large number of Singaporeans
who come for day trips. Double digit growth was recorded for
visitor arrivals from Singapore, Indonesia, China, Japan, Saudi
Arabia, Canada, Australia, Russia and others. According to the
Tourism Board website there has been a drop in arrivals from
Thailand for the past three months caused by violence in southern
Thailand.

New Approach to Promoting Tourism
--------------


8. (U) According to Zulkipli of Malaysia's Tourism Board, the
government is "very interested" in attracting more tourists from the
Middle East, North Africa and Russia, all of which are believed to
have high growth potential and high average expenditure per tourist,
though their tourists travel only in limited seasons. He noted that
Middle Eastern tourists in particular are attracted to Malaysia for
cultural, religious and dietary reasons, with the largest numbers of
tourists coming during the summer. In addition, he surmised that
many Arab tourists have avoided visiting the United States and
Western Europe, where they may face visa difficulties and could feel
"less welcome."


9. (U) In the past, Malaysia marketed itself as a holiday
destination, and is now promoting itself as a shopping haven in a
move to increase the flow of tourists' receipts. The board is
hoping to attract more U.S. tourists, which tend not to travel much
to Malaysia given its great distance from the U.S. While in New York
recently, the tourism board also aggressively promoted Malaysia's
attractiveness for medical tourists and for the MICE (meetings,
incentives, conferences and exhibitions) market.

Issues affecting tourism growth
--------------


10. (U) Malaysia's poor maintenance of public toilets, unscrupulous
taxi drivers, the prevalence of itinerant beggars in tourist zones,
and general lack of cleanliness have been hot issues for the
government as it seeks to attract more tourists from abroad,
according to tourism board officials. Last year the government
installed high-tech toilets in several key shopping areas, and local
authorities and the Housing and Local Government Ministry are
pressuring restaurants and hotels to ensure that toilets are kept
clean.

Hotels Try to Conserve Energy
--------------


11. (U) Econ FSN spoke with Shaha of the Hotel Association, who said
he is optimistic that Malaysia will achieve the predicted number of
tourists, provided no unforeseen global events such as a bird flu
outbreak or a tsunami occurs. He said electricity is the second
largest cost to hotels after salary, which is why his group has
asked Malaysia's power company and the trade ministry (MITI) to
provide appropriate incentives to ease the burden on hotels. The
hotel industry is in operation 24 hours a day, and cannot adjust its
operations to off-peak hours like the industrial and manufacturing
sector. Hotels have made efforts to increase energy efficiency to
mitigate the increased cost of power, according to Shaha, but older
hotels have found this difficult. The hotel industry also has asked
MITI for incentives to cover new equipment for hotels undergoing
renovations and upgrading.


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Pricing Flap Over Harry Potter
--------------


12. (U) Malaysia's biggest book chains (MPH, Popular, Harris, and
Times) briefly launched a boycott of the new Harry Potter book to
highlight how their business is threatened by two hypermarkets,
Tesco and Carrefour. The two hypermarkets initially marketed "Harry
Potter and the Deathly Hallows" at the discounted price of RM69.60
(approximately USD 20),far below its recommended retail price of
RM109.90 (approximately USD 32). Minister of Domestic Trade and
Consumer Affairs (MDTCA) Shafie Apdal defended the hypermarkets,
saying such discounts benefit the public. Shafie's move was
somewhat unusual in that the MDTCA is often called upon to support
smaller scale Malaysian retailers; at the same time, the ministry
expends considerable resources to ensure that Malaysian consumers
are not overcharged for the large number of staple products subject
to government price controls.

MIER Raises Its Economic Growth Forecast
--------------


13. (U) The Malaysian Institute of Economic Research (MIER) has
revised Malaysia's economic growth upwards to 5.7% year-on-year in
2007 from 5.6% forecast a month ago. Despite the revision, the
growth projection is still below the official estimate of 6%. MIER
executive director Mohamed Ariff said the Malaysian economy is
underperforming as it is capable of 6.5% growth. He blamed the
relatively slow growth to weak domestic investment. He also
commented that although FDI inflows to Malaysia have increased in
2006 after bottoming out in 2005, they are still below pre-crisis
levels and lag behind Singapore and Thailand.


Call to Hasten Mergers of Malaysian Banks
--------------


14. (U) Nazir Razak, CEO of CIMB Group, Malaysia's second-largest
banking conglomerate, announced at a conference on the banking
sector that, in his view, the Central Bank should intervene to force
the acceleration of mergers of domestic banks. This would make them
more competitive and better able to withstand the forces of
liberalization, he said. After the Asian financial crisis in 1998,
the Central Bank directed the mergers of many local banks, resulting
in only ten domestic banks by 2000 down from 54 banks just two years
earlier. In 2006 CIMB bought Southern Bank, bringing the number to
nine. Nazir said the merger process is lengthy, and it can take two
to three years for the new bank to become competitive.
Alternatively, he suggested that the Central Bank should raise the
minimum shareholder asset level from its current RM 2 billion (USD
588 million) to RM 10 billion (USD 2.9 billion) to force out the
smaller players. (Note: only two Malaysian banks currently have
assets over RM 10 billion: Nazir's own CIMB Group and Maybank.)


Government To Leave It to Market Forces
--------------

15.(U) Responding to Nazir Razak's call for government intervention
to force further bank mergers, Second Finance Minister Nor Mohamed
Yakcop said the government has no objection to further consolidation
in the banking sector. However, the minister said Malaysia is not
planning to introduce new measures to speed up the process.


LaFleur