Manufacturers warned that weak global growth prospects meant the industry was likely to grow o­nly two percent this year, compared with a five percent official forecast.

The Iraq war and a killer pneumonia outbreak have dealt a double blow to the semiconductor industry, the backbone of the manufacturing sector, said the Federation of Malaysian Manufacturers (FMM) vice president Paul Low.

Manufacturers have to bear higher insurance premiums due to war risks and orders for mostly electrical goods from the Middle East have been cancelled, he said.

Semiconductor exports would be even worse hit if the lethargic US economy plunged into recession, he said.

Not too rosy

Foreign buyers of local goods were also staying away due to the Severe Acute Respiratory Syndrome (Sars) epidemic which sparked a global health scare after nearly 80 deaths worldwide , he said.

Low said the government's growth forecast for the manufacturing sector of five percent, up from four percent last year, was therefore too bullish.

"It is not as rosy as it seems to be. We expect a small growth this year of around two percent," he told AFP .

To cut reliance o­n US and European markets, he said manufacturers were seeking to boost domestic consumption and increase Asian sales which now accounted for some 40 percent of exports.

Growth would be driven by commodities, petrochemicals, plastic products, selected electronics components and the food industry, he added.

Restructuring and deregulating

Manufacturing accounts for about 30 percent of Malaysia's gross domestic product and the FMM's sharply lower projection, coupled with the negative impact of Sars o­n tourism, could see the government's scaled down economic growth forecast of 4.5 percent also out of reach.

The central bank last week slashed the growth forecast from 6.0-6.5 percent, and warned that growth could slide even lower if global economic uncertainties persist.

The government is expected to announce this month a stimulus package to shore up the economy and boost the country's competitiveness.

Low said the government may not have the flexibility to offer tax cuts or incentives as it has been running o­n budget deficits for the last few years.

The key to strengthening the economy apart from fiscal policy was to "restructure and deregulate" to boost efficiency and woo investors, he said. AFP