A recent report by global investment bank, Merrill Lynch downgrading Malaysian stocks is a clear sign the country's economy is at an unhealthy level despite the government's assertions to the contrary, an economist said today.

Speaking on the condition of anonymity, the economist said Merrill Lynch's decision to downgrade Malaysian stocks from 'overweight' to 'underweight' was not surprising adding it was 'common knowledge' the country's economy was on the decline.

"I am stumped by the general reluctance to downgrade the Gross Domestic Product (GDP) forecast of 6.2 percent. I have reduced my forecast to 4.1 percent.

"The people's expectations should be placed much lower," said the economist, who works for an international business market research firm.

"The government was riding on a claim of a general recovery in the second half of the year but we are already in the second half and there isn't any marked improvement," he said.

The economist explained that by downgrading the stocks to 'underweight', foreign investors to the country would now place less into their Malaysians portfolios than originally planned.

This would mean that Merrill Lynch's clients and other companies trusting the recommendations of their bankers would invest less in the country compared to current international investment reference levels.

Opposition party DAP said that the report by Merril Lynch was "an indictment of the country's inability to strengthen its competitive advantages".

"It means an inability to check inflation and to spur economic growth. It affects the country's economic efficiency and productivity. This just goes to show that the government is still in denial of the fact that Malaysia's economy is unhealthy," said party secretary-general, Lim Guan Eng.

'Impossible' target

The government had recently said that the country was on track to achieve a financial growth target of five to six percent in 2005. This forecast had taken into account the spiralling global fuel prices, it said.

Minister in the Prime Minister's Department Mustapa Mohamed was quoted as saying early this month that the country was in 'good shape and in good health' economy-wise.

Lim, however, said the target for a six percent growth was impossible to achieve.

"They're still talking about a six percent economic growth but we all know that it's not possible. This problem should be seriously addressed," he said.

In the same report, Merrill Lynch had upgraded South Korean equities to 'overweight' saying that the East Asian country offered one of the highest potential returns among Asian markets.

Malaysia was deemed as having 'limited upside' to investments.