(AFP) analysis

- A recession looms in Malaysia despite attempts to boost the economy with RM3.5 billion in new spending and an interest rate cut, economists said today.

They hailed pump priming measures to cut reliance on exports and strengthen domestic demand but said this was unlikely to be enough to avert a contraction in the economy, just two years after Malaysia rebounded from a recession brought on by the Asian financial crisis.

"It is a helpful move in the right direction to shore up the impact of the weakening external sector and events of last week," said Song Seng Wun, regional economist with GK Goh in Singapore, referring to the terrorist attacks against the US.

"But it can't turn around GDP. At the end of the day, Malaysia, like all its neighbours, depends on external demand for growth."

The cabinet at its weekly meeting on Wednesday approved another 500 million ringgit in new spending, on top of a three billion stimulus package unveiled in March.

This was followed by an easing of monetary policy Thursday when the central bank cut key lending rates for the first time in two years to mitigate the impact of last week's terrorist attacks.

Growth slashed

Bank Negara Malaysia slashed its three-month intervention rate from 5.5 to 5.0 percent, effectively reducing the ceiling on banks' base lending rate to 6.42 percent from 6.83.

Central bank governor Zeti Akhtar Aziz told reporters Friday that Bank Negara would undertake more "comprehensive measures" to prevent Malaysia from slipping into a recession.

Economists said the new spending would boost the construction and property sectors, while the rate cut would ease the burden on companies and individuals seeking to refinance high debts.

But they said the impact would not be felt immediately in the economy, which is likely to slide into negative growth in the third and fourth quarters.

The American Malaysian Chamber of Commerce, which represents some 300 US firms here, has said some of its members may retrench staff and cut investment as demand plunges further after last week's attacks.

Worldsec Securities economist Peck Boon Soo said government spending and investment made up only about 31 percent of domestic demand, with the bulk derived from private consumption and investment.

More revisions

"The measures are necessary but at best it can only cushion the impact of slowing external demand," he said, noting that domestic consumption had fallen steadily from last year despite pump-priming efforts.

Peck forecast full year economic growth would contract by 0.5 percent.

GK Goh's Song said he would further cut his full year forecast of a 0.1 percent contraction in the economy, predicting the services sector would be hit in coming months due to a decline in tourist arrivals after the US disaster.

The government has said it would cut its official forecast of between five and six percent growth this year, its second revision in six months.

Economists expect the government to provide more stimulatory measures, including tax cuts and rebates, in the 2002 budget to be unveiled next month.

It is likely to be Malaysia's fourth deficit budget in a row but the government has "no choice" to sustain economic activities, they said.

"There is now a more urgent slant to consumption and more pump priming... for corporates and households, tax cuts are on the cards and this will definitely raise morale," said GK Goh's Song.