Malaysia today downgraded its 2005 economic growth forecast to 5.0 percent, the lower end of the 5.0-6.0 percent tipped earlier this year and well down on the 7.1 percent expansion in 2004.

"The economy continues to face greater external challenges, in particular moderation in global growth, a revival in inflationary pressures as well as rising trends in tightening of monetary policy," the Finance Ministry said.

"Notwithstanding these developments, the Malaysian economy remained resilient, growing by 4.9 percent during the first half of the year," it said in its annual economic report issued on Budget day.

The ministry said Malaysia's economic fundamentals remain strong.

"The growth reflects a more broad-based expansion of the economy, with the impetus to growth originating from stronger domestic demand, primarily private sector activities," it said.

GDP growth

The ministry forecast Gross Domestic Product (GDP) would grow 5.5 percent in 2006, driven by private investment spending and a strong services sector.

The manufacturing and services sectors were expected to be the key drivers, with manufacturing tipped to expand 4.9 percent in 2006 from an estimated 4.8 percent this year, backed by a recovery in global electronics demand in the second half of 2005.

Crude oil and natural gas output was projected to increase 4.2 percent and 10 percent respectively in 2006 compared to an estimated decline of 1.5 percent and a rise of 5.0 percent in 2005.

The ministry forecast a recovery in the ailing construction sector in 2006 with a 3.0 percent expansion compared to an expected decline of 1.1 percent this year, fuelled by new projects under the Ninth Malaysia Plan of 2006-2010.

Malaysia's gross export earnings were expected to remain strong, growing by an estimated 10.8 percent in 2005 on the back of demand for electronic products.

Inflation up

The government said it also expects to cut the budget deficit to 3.5 percent of GDP next year from an estimated 3.8 percent in 2005.

It said it would continuously review subsidies as part of efforts to reduce its financial burden as well as promote efficiency and competitiveness.

The inflation rate as measured by the consumer price index (CPI) was projected at 2.8 percent for 2005 against 1.4 percent in 2004.

The finance ministry report said the government will continue to monitor conditions to avert any potential build-up in domestic inflation, while maximising the growth potential of the economy.

For the first eight months of 2005, Malaysia's CPI rate ran at 2.8 percent, stocked by world oil prices which rose 40.1 percent during the same period.