Prime Minister Dr Mahathir Mohamad is expected to unveil a prudent, people-friendly "election budget" on Friday to help consumers and sustain economic recovery, analysts say.

Pleasant surprises are expected for the man in the street because analysts say the 2004 budget, the last for Mahathir before he retires next month after 22 years in power, is designed with an upcoming general election in mind.

The government under Mahathir's successor and current deputy, Abdullah Ahmad Badawi, is widely expected to call elections before the middle of next year although its five-year term expires only in November.

Mahathir, who is also finance minister, may also offer some goodies in his "farewell" budget to "reward the people" but there is no clear consensus on whether there will be a cut in corporate or personal income tax, analysts say.

Another deficit

This is likely to be Malaysia's seventh consecutive budget deficit but analysts say it should not exceed five percent of gross domestic product (GDP). The budget's key focus will be to boost foreign investment and cut government spending.

The 2003 budget deficit is expected to hit 3.9 percent of GDP, down from an earlier estimate of 5.1 percent. The deficit was 5.6 percent of GDP in 2002, 5.5 percent in 2001 and 5.8 in 2000.

"It will be a people-friendly budget because it is just before elections and it will be Mahathir's last," said Christopher Leow, a fund manager at PacificMas Asset Management.

"But I'm not looking so much at tax cuts. The bigger issue is for the government to address the budget deficit."

Malaysia last cut corporate tax in 1998, which at 28 percent still sits higher than the 22 percent in economic rival Singapore - itself committed to shaving two points off by 2005.

Ngu Chie Kieng, head of research at TA Research, said foreign investment rules may be liberalised further and a people-friendly budget would likely contain measures to boost consumer spending.

Sin taxes

RAM Consultancy Services chief operating officer Yeah Kim Leng said the budget would focus on sustaining economic growth and competitiveness.

"The key strategy would be on retaining existing (foreign direct investment) FDI and attracting new FDIs in areas that will promote economic upgrading from manufacturing to services... and promote productive investments," Yeah said.

A personal income tax cut, along with a staggered reduction in pension fund contributions, may be on the cards to put more money into consumers' pockets, he said.

But this may be offset by higher "sin" taxes with the tobacco sector a likely target, analysts said, although the gaming sector may escape higher taxes given the government's recent move to lower them in January.

Casino operators now pay a flat 25 percent tax on their net wins while gaming tax for numbers forecasting operators stands at eight percent of gross sales and pool betting duty at six percent of net sales.

"There are rumours about some (possible increase in) gaming taxes but foreign investors are betting against that and are buying gaming stocks on weakness," said UBS Warburg associate director Wan Ming Sun.

Import tariffs

Other analysts picked the technology sector, as well as research and development, as beneficiaries of the budget.

But the property sector may take a backseat along with tourism as incentives had been given in a RM7.30 billion economic stimulus package announced in May.

Analysts say the automotive sector, seeking a clearer policy on import tariffs ahead of the implementation of the Asean Free Trade Area (Afta) in 2005, may be disappointed this year.

"Our only reservation about placing high hopes is that (national carmaker) Proton may still not be ready to introduce its competitive new range of products yet," Mohaiyani said in a research report. - AFP