MALAYSIA UPGRADING ITS MIDDLE EAST TRADE RELATIONS

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 000569

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR FOR WEISEL, JENSEN

E.O. 12958: N/A
TAGS: ETRD MY PREL XF GCC
SUBJECT: MALAYSIA UPGRADING ITS MIDDLE EAST TRADE RELATIONS

Sensitive But Unclassified

Summary and Introduction
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1. (SBU) Recent visits of senior Malaysian government
officials to the Middle East have highlighted Malaysia,s
interest in expanding its trade and investment ties with the
region, seemingly in parallel with Malaysia's new diplomatic
focus on West Asia. Malaysian trade with the region is
growing strongly, and Malaysia hopes to maintain such growth
by promoting sectors in which it has strong expertise, in
particular the construction of large infrastructure projects.
Malaysia is reinvigorating its long-moribund joint trade
committees in the region, is leading attempts to reach a
trade preferential system among members of the Organization
of the Islamic Conference (OIC),and recently suggested the
time had come for it to consider FTA negotiations with the
Gulf Cooperation Council (GCC) countries. Despite the recent
strong growth and the high-level attention, however,
Malaysia,s trade with the region constitutes less than 4% of
its total trade. The United States and countries in East and
Southeast Asia will remain Malaysia's principal trade and
investment partners for the foreseeable future. End Summary.


2. (U) Senior Malaysian government officials, including the
Prime Minister, Deputy Prime Minister and several other
ministers, have promoted stronger economic ties with the
Middle East on recent visits to that region. Trade Minister
Rafidah Aziz returned to the region in late March for a
follow-up trade and investment mission to the UAE, Qatar,
Bahrain and Saudi Arabia. Though these trips apparently were
scheduled some time ago, and the PM is traveling frequently
to the region given his position as chair of the Organization
of the Islamic Conference (OIC),these visits reflect the
increasing economic importance of the region to Malaysia.

Fast-Expanding Two-Way Trade
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3. (U) According to Malaysian government statistics, two-way
trade between Malaysia and West Asia (which it defines as the
countries of the Arabian Peninsula, as well as Iran, Iraq,
Syria, Jordan, Lebanon, and Turkey) amounted to 29.5 billion
Malaysian ringgit (approximately USD 8.5 billion) in 2006, an
increase of over 30 percent from 2005. Imports from West
Asia to Malaysia increased by 40.4% while Malaysian exports
to the region increased by 20.8% in 2006 compared to 2005.
Malaysia,s largest trading partner in the region is the
United Arab Emirates, accounting for 30.6% of Malaysia,s
trade with the region, followed by Saudi Arabia (27.1%),Iran
(9.8%),Oman (9.4%),Turkey (6.7%),and Kuwait (4.4%). The
region,s largest single exporter to Malaysia is Saudi Arabia
(with 42.3% of the region,s exports),while the UAE is the
largest importer from Malaysia (45.2% of Malaysian exports to
West Asia).

The PM Pushes Trade and Investment Opportunities
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4. (U) Prime Minister Abdullah Badawi,s late February visit
to Syria included an announcement that Syria is seeking
Malaysia,s participation in completing the remaining 60
kilometers of the Damascus Ring Road, a project reportedly
worth 2.5 billion Malaysian ringgit (USD 714 million).
Abdullah also announced other Malaysian-Syrian joint ventures
worth 1.8 billion Malaysian ringgit (USD 515 million) in the
areas of real estate development and higher education.
Malaysian Works Minister Samy Vellu further noted that Syria
was seeking Malaysian participation in the design of a new
international airport and the construction of low cost houses
as well as hospitals.


5. (U) At Abdullah,s subsequent stop in Yemen, both
countries announced the establishment of a joint trade
committee (JTC) to facilitate bilateral trade and investment,
to be chaired by the trade and industry ministers of both
countries (in Malaysia the Minister of International Trade
and Industry, or MITI). Malaysian firms reportedly secured
7.68 billion ringgit (USD 2.19 billion) worth of projects,
primarily for road construction and the development of power
plants and power transmission projects.

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Trade Minister Rafidah Keeps Up The Pressure
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6. (U) Minister of International Trade and Industry Rafidah
Aziz, who accompanied the PM to Syria and Yemen, returned to
the Middle East in late March to lead a trade and investment
mission to the UAE, Qatar, Bahrain, and Saudi Arabia. The
last country on the mission includes a specific "construction
marketing mission" with stops in Jeddah and Riyadh,
reflecting Malaysia,s intention to export its significant
construction expertise. Malaysia is particularly eager to
promote its construction sector since it is the only
significant economic sector that has contracted in recent
years, due to a general downshifting in the development of
mega-infrastructure projects inside Malaysia.


7. (SBU) At Rafidah,s stop in Dubai on March 22, she
announced that Malaysia had raised the possible launch of
free trade agreement (FTA) negotiations with the Gulf
Cooperation Council (GCC) countries (Saudi Arabia, Bahrain,
Kuwait, Oman, Qatar and the UAE),and was waiting for a
response from the GCC. However, Ho Siew Ching, Principal
Assistant Director for West Asia at MITI, told econoff that
any launch of an FTA with the GCC, or with any of its member
states, was not imminent, due in part to resource constraints
within MITI that inhibit its ability to launch new FTA
negotiations. Malaysia was more likely to continue using its
JTCs, which it now has with most of the region,s countries
(except Saudi Arabia and Bahrain),as forums for
government-to-government discussions on trade and investment.
These JTCs, similar to the Trade and Investment Framework
Agreements that the United States has signed with many
countries, have been in place with many of the region,s
countries for several decades, but for the most part have
been moribund until recently, according to Ho.


8. (SBU) In addition to its interests in reviving the JTCs,
and in eventually launching an FTA with the GCC, Ho added
that Malaysia was also a strong supporter of the OIC,s
long-standing goal to implement a trade preferential system
(TBS-OIC) among its members. She noted that progress was
being made under PM Abdullah,s OIC chairmanship, with a
second round of TPS-OIC negotiations having been held in
November 2006 in Turkey, and a target implementation date set
for January 1, 2009.


9. (SBU) Malaysia,s evolving approach to its trade relations
in the Middle East increasingly is focused on oil-rich states
seeking to diversify their economies into areas beyond the
petroleum sector, Ho told econoff. Almost half of
Malaysia,s exports go to the UAE, which Malaysia sees as a
good match for its most competitive sectors, including not
only construction but also the ICT sector and Islamic
financing. In the latter area, Malaysia is also welcoming
greater participation in its own Islamic banking sector by
Middle Eastern firms. Banks from Qatar, Kuwait and Saudi
Arabia have received licenses from the Malaysian central bank
to establish a number of branches in Malaysia, despite a
history of foreign firms generally facing significant
constraints in operating in this sector. Malaysia also hopes
to attract increasing numbers of Mideast visitors, including
for medical tourism and education.

A Businessman,s View
--------------


10. (SBU) A Malaysian business leader recently told Econ
Counselor about his firm,s first foray into the Middle East:
a project to build two wharves in Saudi Arabia. He said he
was surprised at how much easier it was to do business in the
Middle East, in contrast to neighboring Indonesia. As a
Malay, this businessman could negotiate with his Indonesian
clients in his own language. But in Saudi Arabia, he found
"the decisions are faster, the corruption is lower and you
know the check won,t bounce." He plans to reallocate some
of his promotional resources from ASEAN countries to the Arab
market.

Comment
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11. (SBU) Expanding trade and investment ties with the Middle
East is a strategy with few disadvantages for Malaysia.
Malaysia,s economy largely complements the economies of the
Middle East rather than competes with them. Flush with
petroleum revenue and seeking sustainable development beyond
the energy sector, many of the region,s countries find it
attractive to do business with a country that not only has
real experience in advancing development (especially when
"development" means large scale infrastructure projects like
highways, airports, and skyscrapers),but also is a Muslim
majority state. Leveraging his OIC chair, Prime Minister
Abdullah has strengthened Malaysia,s political ties with the
region, and lobbied for a say in Middle East peace issues.
In parallel, Malaysia is using these ties to push for
increasing contracts for Malaysian firms. Abdullah champions
an economic and development agenda within the OIC, and
promotion of greater economic linkages within the Muslim
world, efforts that coincide neatly with Malaysia's own
overseas trade and investment goals.


12. (SBU) Trade Minister Rafidah,s statement on the possible
launch of an FTA with the GCC reflects the GOM,s increasing
awareness that Malaysia has a lot to gain from pursuing more
FTAs. An FTA with the GCC or with some of its member states
would be significantly less comprehensive than the FTAs that
the U.S. negotiates, which would appeal to Malaysia. Such
FTAs would no doubt find favor from Malaysia,s would-be
partners in the Mideast, including its major trading partner
the UAE which, like Malaysia, has negotiated an FTA with the
United States, with no agreement reached so far.


13. (SBU) Malaysia,s recent high level economic interest in
the Middle East, including a potential Malaysia-GCC FTA,
appears to have more to do with its desire to expand trade
and investment with friendly countries that have a lot of
money to spend, rather than as a reaction to the inability,
so far, for it to agree on an FTA with the U.S. Moreover,
with West Asia constituting less than 4% of Malaysia,s total
trade with the world, an FTA with all or some of the
region,s countries likely would have limited impact in the
near to medium term, at least compared to an FTA with the
U.S., Malaysia,s largest trade and investment partner.
SHEAR