Measures taken by the government, including capping fuel prices and road toll charges, should help it to weather the impact of soaring oil costs whilst its position as an oil exporter provides additional protection, economists said today.

They said the latest government action wisely aims at both keeping inflation in check without raising interest rates and ensuring that domestic demand will continue to drive the economy.

The near-term cost, however, could be further pressure on already strained government finances.

"This will put a temporary halt to speculation that the goverment will raise oil prices. This will help bolster consumer sentiment and spending and there will be less inflationary pressure, which is crucial for growth," Suhaimi Saidi, economists with AmSecurities, told AFP .

"With this plan in place, I think Malaysia will be able to contain inflation for the year to below three percent," Suhaimi said, adding: "We had previously forecast it could be above three percent."

Malaysia's inflation hit a six-year high of 3.2 percent in June due to soaring petrol prices and transportation costs while economic growth slowed to 4.1 percent year-on-year in the three months to June from 5.8 percent in the first quarter.

Taken together, the figures sparked concerns the country faced a double whammy of rising prices and a slowdown as oil prices spiked above US$70 a barrel in the aftermath of Hurricane Katrina in the United States.

Boosting consumer spending

Responding Wednesday, the government said it would take a series of measures "to reduce the economic burden of low income earners," chief among them a decision not to increase fuel prices again until the end of 2005.

To reduce the impact of rising business costs, the government cut road tax by 25 percent for all businesses, effective Sept 12, and ordered highway operators not to raise toll rates until the end of next year.

Additionally, financial assistance to the needy and the aged would be increased to help them cope with rising costs.

Vincent Khoo, head of research with Hwang-DBS Vickers Research, said without doubt the new measures would have a positive impact on the economy and help low income groups sustain their spending.

"All these measures, on the whole, will prop-up consumer spending," he said.

At the same time, Suhaimi of AmSecurities cautioned that the plan may also hamper government efforts to rein in the budget deficit.

"This may force the government either to dig deeper into its pocket or shelve less important projects to contain public spending since the plan would require more spending and a loss of revenue," he said.

Domino effect

The government had previously said it planned to bring the budget deficit down to 3.8 percent of gross domestic product in 2005 from 4.3 percent in 2004.

Suhaimi also said that since Malaysia was a trading nation, the energy shock may have an impact on its key trading partners such as the United States and Japan and this may hurt its exports.

"My worry is if the economies of our major trading partners - the US and Japan - slow down due to rising oil prices, it can hurt us since ours is an open economy," he said.

Officials have up to now been optimistic that Malaysia would meet this year's growth target of 5.0-6.0 percent but private sector analysts have been more cautious in the face of rising inflation and its impact on demand, especially in light of the second quarter slowdown.