Malaysia's tough new capital controls and worsening relations with Singapore have forced analysts to make further gloomy forecasts about its economy. Instead of a short blip into temporary negative growth, many economists are resigned to the likelihood that Malaysia's recent measures to shore up its own economy could send its southern neighbour into full-blown recession. Malaysia's flight into isolation could not come at a worse time for Singapore. It is also suffering from dwindling demand from the United States' electronics industry, lingering fears over a possible devaluation in the yuan and the fallout from Indonesia's economic and political deterioration. SG Securities economist Neil Saker said: 'Malaysia's drastic measures compound the deteriorating global environment for Singapore. 'The island could lose out in worsening bilateral relations with Malaysia, and in the longer term, have its role as regional nodal point for trade and financial flows undermined.' SG Securities this week cut its growth forecast for Singapore to 1 per cent this year and 0.5 per cent for next year. Many economists had been forecasting slight growth for Singapore this year and next, but in the wake of the Malaysian measures, they are considering downgrading their forecasts again. There had been hopes that Singapore's economy could begin to bounce back in the latter stages of next year. Now this may be foiled. Quantifying the direct impact of Malaysia's new foreign-exchange controls on Singapore is proving difficult at this early stage. Economists say a lot depends on how strictly Malaysia's new foreign-exchange rules are implemented and administered and whether a black market will emerge. Paul Alapat, economist at Indosuez WI Carr, said: 'A lot depends on how disruptive servicing payments is going to be.' Under Malaysia's new foreign-exchange rules, all ringgit held abroad will no longer be recognised after October 1. All international trade must be conducted in foreign currency and to convert more than M$10,000 (about HK$20,300), special permission will be needed for each transaction from the central bank. Transactions in Malaysian stocks abroad will no longer be recognised. And Malaysians will have difficulty converting their ringgit to spend overseas. These measures are bound to have an immediate negative effect on Singapore's financial services, commerce, tourism and retail sectors. Trading of Malaysian stocks on Singapore's over-the-counter market is to be suspended, and Singapore no longer has any ringgit currency trading or loan business. However, economists warn that their biggest concern is if Bank Negara is deliberately slow in granting approvals for importers and exporters wanting to channel goods through Singapore's port. Long hold-ups could also emerge at the Singapore-Malaysia border if customs officers in Johore insist on searching every vehicle for currency being smuggled out the country. Any delays in payments or congestion at the border could be damaging for exporters needing to meet just-in-time orders. Vickers Ballas economist Eddie Lee said: 'The Malaysian authorities have been trying to create disincentives for Malaysians to use Singapore's port for a long time. 'If that is the case then I think we could see a much bigger impact on Singapore six months down the road than we originally thought.' Merrill Lynch economist Tan Min Lan said: 'It is the biggest unquantifiable risk at this point. There is so much uncertainty about how these capital controls are going to be affected.' Efforts by Kuala Lumpur to encourage Malaysian firms to channel goods through their own ports, especially Port Klang, have largely been ineffective. Re-exports account for more than 40 per cent of Singapore exports, and Malaysia has long been a crucial source of these. Exports from Singapore to Malaysia account for about 17 per cent of Singapore's exports. Independent Economic Analysis economist Jimmy Koh said: 'After persistent talk by the Malaysian authorities that they will ban the use of Singapore ports by Malaysian companies, they could well do the same for Malaysia's purchase of Singapore exports. 'The crux is that government approval is now needed for foreign-exchange demands and the deteriorating political relations between the two countries could hamper on-going links.' Malaysian Prime Minister Mahathir Mohamad's new economic measures might not be all bad for Singapore. By effectively sealing Malaysia off from outside speculative forces, Dr Mahathir hopes to progressively lower interest rates to reflate the economy. With a free-floating currency this would not have been possible, without huge costs. If Dr Mahathir succeeds with his high-spending approach, and the Malaysian economy begins recover, then Singapore will no doubt feel some benefits. Sassoon Securities economist Liew Yin Sze said: 'This is not altogether negative for Singapore. 'If Malaysian prices had been left to spiral downwards, you can imagine the impact on Singapore banks and other firms' non-performing loans.' Also, a lot depends on how long Malaysia decides to keep its doors closed.