The government's RM7.3 billion stimulus package throws a lifeline to businesses hit by Sars but economists today said it will not be able to lift growth to a targeted 4.5 percent this year.

Tour agents, hoteliers, manufacturers and other business groups gave the thumbs-up to wide-ranging measures in the package, unveiled yesterday by Prime Minister Dr Mahathir Mohamad, to buffer the tough times.

But analysts said the impact would not be immediate and it would be tough to reach the 4.5 percent official growth forecast given the global economic uncertainties and renewed threats of terrorist attacks.

"The package will give the economy a small boost in 2003 but we think growth will be below four percent due to lacklustre exports and foreign investment," said Paul Schymyck, economist with IDEAglobal in Singapore.

Private consumption

Malaysia has cut its official economic growth forecast to 4.5 percent this year from 6.0-6.5 percent due to the Iraq war and the Sars outbreak.

The package, which has been delayed successively since March, offers an interest rate cut, a o­ne billion ringgit relief fund and tax breaks for the tourism sector, liberalisation of foreign investment rules and loan programs for troubled traders.

A two percentage point cut in employees contribution to the pension fund for a year and a half-month bonus for civil servants are also expected to release RM2.7 billion disposable income into the system.

Analysts said the government was pinning hopes o­n private consumption to drive growth, unlike the two previous off-budget packages totalling RM7.3 billion in 2001 which relied heavily o­n infrastructure spending to generate growth.

They hailed the move to shift the spending burden to banking institutions, with o­nly RM1.7 billion coming from government coffers, in light of the growing budget deficit.

Grim job prospects

The focus had been "shifted away from mega-project spending to developing SMIs and promoting" entrepreneurship, OSK Research said.

It said the package would o­nly widen the budget deficit from 3.9 percent of gross domestic product to 4.3 percent, still lower than 5.6 percent last year.

"However, we believe that despite these measures, growth is likely to come below the 4.5 percent rate," it said, forecasting 3.5 percent.

Azrul Azwar, economist with MIDF Sisma Securities, concurred the government's target was out of reach amid the cloudy global outlook, renewed terrorism fears and the persisting Sars threat.

He said the cut in employees contribution to the pension fund may be ineffective to boost consumer spending given the grim economic outlook and job prospects.

"The package has greatly reduced the risks of further downgrades in the 2003 GDP outlook but we stick to growth target of 3.3 percent," he added.

Other economists warned the cut in the central bank's intervention rate, the first since 2001 and which led to lower lending rates for businesses, would hurt banks' profit margin.

Boon for hotels

The Malaysian Association of Hotels lauded the package, saying it was timely as occupancy rate fell further to 40 percent in the first two weeks of May from 42 percent last month.

This led to a loss of more than RM135.5 million in revenue since April for its 307 members, it said in a statement.

Association president Mohamad Ilyas Zainol Abidin said a five percent discount in electricity bill and suspension of tax payments helped ease their tight cashflow, "allows hotels to breathe a little" and prevent massive layoffs.

The Malaysian Association of Tour and Travel Agents shared the same sentiments but urged financial institutions to ensure speedy disbursements of the new working capital.

It also called for a restructuring of existing bank borrowings for players in the tourism sector, Malaysia's second largest foreign exchange earner, to further soften the blow from Sars.

IDEAglobal's Schymyck said Malaysia must further sharpen its competitive edge in the long term, such as by cutting its 28 percent corporate tax rate which is high compared to Singapore's 22 percent. AFP