Malaysia today scaled back its 2006 economic growth forecast to 5.8 percent from 6.0 percent, citing challenges including high oil prices and competition from China and India.

"Economic management in 2006 remains challenging amidst an environment of persistently high crude oil prices, rising global interest rates and increasing competition from China, India and other emerging economies," the Finance Ministry said.

However, strong economic fundamentals would see real Gross Domestic Product (GDP) expand by 5.8 percent in 2006, it said in its annual economic report issued on Budget day.

It said growth in 2006 would be broad-based, with the services sector the key driver.

The ministry tipped GDP to expand 6.0 percent in 2007, with growth expected in all sectors, led by services, manufacturing and agriculture.

While downside risks such as further hikes in international interest rates and geopolitical tensions would persist, the ministry said Malaysia, a net oil exporter, would profit from higher crude prices in 2007.

"Given Malaysia's endowment of crude oil resources and with prevailing high oil prices, the nation is in a better position to weather the moderation in global growth to achieve a strong growth of 6.0 percent in 2007," it said.

The manufacturing sector is expected to expand 6.8 percent in 2007 compared to the 7.3 percent forecast for 2006 while services will register higher growth of 6.0 percent compared to 5.7 percent for this year, the ministry said.

Agriculture, largely supported by palm oil and a higher output of food crops, is expected to grow 4.7 percent next year after 5.3 percent in 2006, with the mining sector up 4.5 percent after 2.4 percent due to higher production of crude oil and gas.

Cut budget deficit

The construction industry, which will only see estimated 0.7 percent growth in 2006, is tipped for a higher rate of 3.7 percent next year due to infrastructure projects under a 2006-2010 development plan, the ministry said.

The government said it also expects to cut the budget deficit from an estimated 3.5 percent in 2006 to 3.4 percent of GDP next year.

The inflation rate as measured by the consumer price index (CPI) is projected at 3.7 percent for 2006 against 3.0 percent in 2005 due to higher crude oil prices.

"Nevertheless, inflation is expected to remain manageable following gains in labour productivity as well as appreciation of the ringgit," said the report.

For the first seven months of 2006, Malaysia's CPI rose 3.9 percent following higher energy costs.

Unemployment is expected to remain steady at 3.5 percent of the workforce in 2006 and 2007.