Malaysia faces rosier growth prospects in 2004 following some disruption this year, with an upcoming general election expected to give a further boost to one of Southeast Asia's fastest growing economies.

The country's new Prime Minister Abdullah Ahmad Badawi is expected to secure his own personal mandate from voters after taking over from veteran strongman Dr Mahathir Mohamad who retired October 31 after 22 years in power.

The market has so far welcomed his initial moves on the economy, which has turned the corner after a bleak start, with the Iraq war and the deadly Severe Acute Respiratory Syndrome (Sars) outbreak in the region forcing Malaysia to cut its 2003 gross domestic product (GDP) growth forecast to 4.5 percent from 6.0-6.5 previously.

Recovery in exports

In May, the government announced a RM7.3 billion (US$1.92 billion) stimulus package and cut interest rates for the first time in two years in an effort to kick start the economy.

Growth has since picked up, with stronger manufacturing and a recovery in exports, underpinning government's hopes of a 5.5-6.0 percent expansion in 2004, the highest in four years.

Economists forecasts polled by financial news wire AFX-Asia expected an average 4.8 percent growth this year and 5.4 percent in 2004. Higher global semiconductor demand underpins this positive outlook as electrical and electronics products make-up about half of Malaysia's exports.

"Prospects next year are rosy given the renewed demand for exports, strong domestic activities and the multiplier effect from the stimulus package," said Manokaran Mottain, economist wtih SBB Securities.

"An election will also drive up the equity market and increase consumer spending."

Singapore-based research firm GK Goh predicts general elections in the first quarter followed by polls for the ruling United Malays National Organisation (Umno) six months later, which could lift the stockmarket by as much as 20 percent.

Pak Lah's first test

The general election, due late 2004 but widely tipped to be called earlier, will be the first test for Abdullah, a former foreign minister with no economic experience. Economists believe future policies will be significantly shaped by the mandate he gets from voters.

The key opposition challenge to Umno, the dominant party in the ruling coalition, comes from the hardline Islamic Party (PAS) which rules two of Malaysia's 13 states and aims to capture four more in the upcoming polls.

GK Goh warned that the loss of another state to PAS would be negative for Abdullah as it would add to foreign investor concerns over a rise in Islamic extremism. Without a bigger mandate, he also risks being challenged as Umno president in subsequent party polls, it said.

"Only with a resounding victory can he move freely and put his personal (stamp) on the country's economic policies but any shifts are unlikely to be drastic or abrupt," said Azrul Azwar, economist with MIDF SISMA Securities.

Abdullah, who is also finance minister, has so far appeared to be moving away from the huge projects favoured in the Mahathir era. In the past week, the cabinet notably deferred a controversial multi-billion-dollar rail project in favour of smaller development schemes in order to keep the budget deficit in line.

On the flipside, economists warn growth could be affected if too many projects are cancelled.

They say Abdullah has to also address structural issues such as competitiveness and productivity, and perhaps review the ringgit peg of 3.80 to the dollar, the last remnant of capital controls imposed by Mahathir in 1998.

Foreign investment is another issue, having slumped since 2001 amid rising competition from China and regional rivals like Thailand. - AFP