Bank Negara Relaxes Rules on Banks' Equity Investments;

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 000187 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: Bank Negara Relaxes Rules on Banks' Equity Investments; Johor Flooding Causes Major Losses: Malaysia Economic Update for January 2007 REF: (A) Kuala Lumpur 006; (B) Kuala Lumpur 105 ¶1. (U) Summary: Bank Negara has allowed banks greater freedom to invest in the stock market, while three more foreign financial institutions have entered the Malaysian market. Meanwhile, the recent flooding in Johor is projected to cause at least RM 2.4 billion (USD 686 million) in losses, although senior Malaysian officials maintain that the stimulus from reconstruction activities will offset the potential impact on economic growth. End Summary. New Investment Policy Framework for Banks -------------- ¶2. (U) Bank Negara relaxed its investment policy framework for financial institutions by giving banks greater flexibility with respect to their stock market investments. Under the revised framework, which took effect on January 3rd, the limit on a bank's investment in stocks has been raised to 25% of its capital base from the existing 10%. In addition, banks will be allowed greater flexibility in determining their internal policy governing their investments, including the types of equity investments they can make (now expanded to include to all listed shares, preference shares, unlisted shares and foreign equities) and the limits on exposure to a single company. The regulations also permit banking institutions to take up to a 5% equity stake in another banking institution. ¶3. (U) Bank Negara believes the new regulations will provide banks with greater flexibility in making investment decisions and help alleviate surplus liquidity resulting from a slowdown in loan growth. Furthermore, with an additional RM 15 billion (USD 4.3 billion) of funds available for investments in shares by the banks, the new measure are expected to give a shot in the arm to Malaysia's stock market. The banking system's loan-deposit ratio eased markedly to 74% as growth in loans moderated to 6.3% while deposits rose 16.3% as of the end of December 2006. As of mid-January, Bank Negara mopped up an estimated RM 206.5 billion (USD 59 billion) of excess liquidity in the banking system. 3rd Foreign Islamic Bank Sets up Shop in Kuala Lumpur -------------- -------------- ¶4. (U) Asian Finance Bank (AFB) of Qatar, one of the three foreign banks to have received an Islamic banking license from Bank Negara, started operations in Kuala Lumpur on January 9. Qatar Islamic bank owns a 70% stake in AFB, RUSD Investment Bank Inc. of Saudi Arabia 20% and Global Investment House of Kuwait 10%. AFB CEO Faisal Alshowaikh said the bank would use Malaysia as a hub by expanding into neighboring countries and the region, and as a way to channel funds from the Middle East. The bank has a paid-up capital of US$100 million and plans to add another 5 to 7 branches in major cities in Malaysia within the next two to five years. Kuwait Finance House and Al Rajhi Bank of Saudi Arabia are the other two fully foreign owned Islamic banks in the country. Securities Commission Approves Nomura's Foreign Fund Manager License -------------- -------------- ¶5. (U) Nomura Asset Management has become the second foreign fund manger granted a license to operate in Malaysia. In a move to expand the growth of its capital market and encourage offshore investments, Malaysia announced in 2005 plans to offer licenses to five foreign asset management companies. The government has granted a license to Aberdeen Asset Management Asia Ltd. BNP Paribas Asset Management is expected to be the third recipient of a foreign fund manager license. Bank of Baroda Plans to Establish Kuala Lumpur Branch -------------- -------------- ¶6. (U) Bank of Baroda, India's fifth largest bank, plans to set up a full fledged subsidiary in Malaysia (the bank currently has only a representative office in Kuala Lumpur). Baroda chairman and managing director Dr. Anil Khandewal said the bank has sent an application to Bank Negara and is confident that it would be allowed to set up a branch by mid-2007. Bank of Baroda's new branch in Kuala Lumpur is expected to be a joint venture between Bank of Baroda and two other Indian commercial banks, Bank of Maharasthra and Oriental Bank of Commerce. [Comment: Except for three foreign Islamic banks, Bank Negara has not permitted the entry of new foreign banks in the Malaysian market for the past several decades. KUALA LUMP 00000187 002 OF 003 Bank Negara has in recent months, however, given increased flexibility to existing foreign banks in Malaysia by allowing them to establish between four to six new branches at approved locations. End comment.] Flooding Causes Major Economic Losses for Johor -------------- -- ¶7. (U) A report by Alliance Research, the research arm of banking group Alliance, estimates that the flooding that occurred in the southern peninsular Malaysian state of Johor between December 19 and January 12 (Reftel B) will cause economic losses estimated at around RM 2.4 billion (USD 686 million),including cleanup and reconstruction. The flooding dampened consumer spending in the commercial sector, depressed the property market, and disputed industries such as palm oil production, which will likely result in a rise in crude palm oil prices. ¶8. (U) The Alliance Research report further predicted that Johor's mean monthly household income of RM 3,076 (USD 879) would also take a hit, possibly in the range of 10% to 15%, due to the loss of economic activity and productive man-hours. On the other hand, the local construction and healthcare sectors are expected to receive a boost from the flooding, the former from rebuilding efforts already underway and the latter from flood induced disease control measures. An official from the Malaysian Small Medium Industries Association (MSMIA) told EconFSN their members had suffered huge personal losses as a result of the flooding and had missed out on the yearend and pre-Chinese New Year shopping seasons. MSMIA is appealing to the government to provide low interest loans to help members rebuild their businesses. Lack of Power; Major Infrastructure Damage -------------- ¶9. (U) Officials say flood victims will have to cope without electricity for at least the next few months. Tenaga Nasional, the national utility company, said a total of 788 electricity substations have been shut down as a result of the flooding and that some RM 10 million (USD 2.85 million) will be needed to repair the equipment. The company promised to replace residences' power meters for free after the situation improves. ¶10. (U) GOM officials estimate the damage to Johor's public infrastructure, such as roads, bridges and schools, at more than RM 100 million (USD 28.5 million). Damages to infrastructure related to other economic activities, such as plantations, manufacturing and services, have not yet been assessed by the government. ¶11. (U) Some senior officials are arguing that the stimulus to the construction industry from the rebuilding exercise will significantly offset the direct economic losses from the flood. Finance Minister II Nor Mohamad Yakcop told a visiting U.S. government official that he anticipates no slowdown in growth this year or next. The Rebuilding Begins -------------- ¶12. (U) Repairing the public infrastructure is expected to begin just before the Chinese New Year celebrations on February 18 with an approved budget of RM 184 million (USD 52.5 million). An economist from a securities house told EconFSN that it will take more than three months for most victims of the flood to rebuild their lives and get back to normal, while other analysts predict it will take between 10 to 15 months for the state to stage a full recovery. The Johor state government said it will furnish displaced residents with low cost housing in the near future. ¶13. (U) Prime Minister Abdullah Ahmad Badawi, who visited relief centers in the affected areas and spent time with the victims, directed government agencies to give out financial aid as quickly as possible. He also called on financial institution to relax loan repayments schedules for farmers and other victims of the natural disaster. The government has given children school books, uniforms and book bags to lighten the burden on those families who have lost everything in the flooding. ¶14. (U) Johor officials are also taking steps to woo back visitors from neighboring Singapore. The state is a popular destination for Singaporeans, who have invested heavily in high end property and KUALA LUMP 00000187 003 OF 003 frequently travel back and forth to the state for shopping and dining. During the bad weather, hotel occupancy rates declined 30%, severely affecting the employment of tour agents and guides. ¶15. (U) As reported in Reftel B, the flooding in Johor, said to be the worst in the state in over 30 years, has claimed 17 lives and caused the evacuation of over 100,000 residents. Kota Tinggi, the hardest hit town, was submerged under 1.5 meters of water after local rivers overflowed. Several other cities were also affected, including Segamat and Johor Bharu. During the flooding Johor was at times reported to be completely inaccessible by road. LAFLEUR