KUALA LUMPUR: Malaysia's government cut spending in its 2010 annual budget to rein in a ballooning deficit as it forecasts the economy will rebound to grow 2-3 percent after a recession this year. Prime Minister Najib Razak's speech to parliament Friday will announce details of the budget, which is expected to include plans to revamp expensive fuel subsidies and measures to woo foreign investors including a "second wave of privatization" of state run companies.

The Finance Ministry in a report said development spending will fall by 4.4 percent to 51.2 billion ringgit ($15 billion) next year with spending to taper off following the completion of some major projects. For the first time in years, the government's operating expenditure will be trimmed sharply by 13.7 percent to 138.3 billion ringgit ($40.8 billion) following cuts to fuel subsidies, services spending and grants to statutory bodies, it said.

This will bring the federal government's budget to 189.5 billion ringgit ($55.7 billion), down 11.3 percent over 2009. With the reduced spending, it said the fiscal deficit is expected to narrow to 5.6 percent of gross domestic product in 2010 from 7.4 percent forecast for this year.

The government also narrowed its forecast for the contraction in the economy this year to 3 percent following pump priming that included new spending of 67 billion ringgit ($19.7 billion). It earlier expected the economy to shrink 4 to 5 percent.

"The government is committed to fiscal responsibility and sustainability over the medium term while supportive of economic recovery," the report said. "With improving domestic and external demand, prudent fiscal stance and measures to strengthen recovery in the 2010 budget, the economy is expected to grow between 2 and 3 percent in 2010.

" Economists welcomed the new fiscal prudence, which will give Malaysia flexibility to deal with future economic slumps. It will improve investor sentiment and further bolster the Malaysian ringgit and debt markets, they said.

The ringgit recently strengthened and is currently hovering at around 3.40 to the dollar. "Malaysia has been the ugly ducking in the region.

This will help the economy and give investors less skepticism," said Philip McNichols, an economist with research firm IdeaGlobal in Singapore. Foreign investors have been wary after Malaysia's ruling coalition suffered heavy losses in general elections last year, losing its traditional two-thirds majority in Parliament to a resurgent opposition.

The finance ministry said steps will be taken to improve the investment climate and to attract foreigners to buy stakes in local companies. Some government agencies will also be privatized under a second wave of privatization, it said.

"Barriers to investment including policies, rules, regulations and procedures will be reviewed," the report said, without elaborating. Najib has relaxed a host of restrictions on foreign investment in the financial services sector as part of his first major policy reforms soon after taking power early April.

The finance ministry said the 2010 budget will center on shifting the nation to a high-income economy by bolstering private investment, ensuring sustainable development and focusing on the people's welfare. It said fuel subsidies will be reviewed to ensure the spending in this area is lean and benefits those who need the assistance most.

Subsidies for fuel, food and education are expected to plunge 30 percent this year to 24.5 billion ($7.2 billion) and expected to shrink another 15 percent to around $21 billion ($9 billion) in 2010, the report said.