(Adds quotes, economists)
By Soo Ai Peng and Razak Ahmad
PUTRAJAYA, Malaysia, May 28 (Reuters) - Malaysia's economy will shrink by as much as 5 percent in 2009, its biggest fall in a decade, and Prime Minister Najib Razak pledged on Thursday to enact more reforms to boost competitiveness.
Najib told journalists that the economy would shrink by between four and five percent, a far worse outcome than the decline of up to one percent forecast by the government previously and below what many economists had projected.
The new forecast came out after data on Wednesday showed that Asia's third-most export dependent economy shrank 6.2 percent in the first quarter from a year earlier. much worse than 4 percent drop forecast in a Reuters poll.
"We are hoping the second half of this year will be better, the fourth quarter will be positive," Najib said.
Most economists said however that the Malaysian government, whose earlier forecasts were viewed as way too optimistic, was now trying to manage expectations.
"Minus 4 to minus 5 is a very severe number. It's like saying that it's nearly as bad as it was during the Asian financial crisis, which I don't think is the case," said Citigroup economist Kit Wei Zheng.
The new full-year forecast would be the worst recession for Malaysia since the 1998 Asian financial crisis in which the economy shrank by 7.4 percent before rebounding strongly with 6.1 percent growth in 1999.
DOWNTURN, DEFICIT AND UNDERPERFORMANCE
Like other exporters in Asia, Malaysia has seen demand for its goods, mainly electronics, commodities and oil, hit by the global crisis.
In addition it faces a surging budget deficit which will hit 7.5 percent of gross domestic product this year and has for years failed to meet growth targets aimed at bringing the country of 27 million people to "developed nation" status by 2020.
Economic growth under the country's 9th Malaysia plan was planned at an average of 6 percent a year from 2006-2010 inclusive, but it has been stronger than that in only one year.
Based on a simple average of published data and the most optimistic government view of a 4 percent contraction in the new forecast, average annual growth from 2006-2009 will be just 3.175 percent, according to Reuters calculations.
Najib, who took office in April, has won some plaudits for edging forward with economic liberalisation to help boost demand and competitiveness in the services industry, which is less vulnerable to sudden shifts in global demand.
However, there has been no signature reform from his government, which came to power after incumbent Abdullah Ahmad Badawi was ousted by the National Front coalition after a series of electoral losses following a poor showing in the 2008 general election.
Economists say that Malaysia needs to end a system of economic and social preferences for ethnic Malays, the majority population, that critics say has stymied competitiveness and fostered corruption.
Malaysia has run bigger and bigger budget deficits in recent years despite booming demand for its exports at a time when the world economy was growing. It is now countering the global downturn with more spending that will take its budget deficit to 7.5 percent of gross domestic product this year.
"The government is trying to strengthen the economy's resilience and competitiveness by ensuring that ... liberalisation is intensified," Najib said, adding that new rules to speed foreign investment approvals would be announced soon. (Additional reporting by Niluksi Koswanage, Liau Y-Sing and Julie Goh; Writing by David Chance; Editing by Jan Dahinten)