PM Launches Northern Corridor Economic Region; Malaysia

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