Malaysia's controversial capital controls, which caught most of the financial world off guard when they were imposed on September 2, may just be starting to work, analysts and economists say. Since then, the stock market has soared 60 per cent, interest rates have tumbled 240 basis points, and foreign exchange reserves have risen by US$2.7 billion. Observers cautioned, however, that the coming months would be a critical period for the high-stakes gamble. Suhaimi Ilias, economist at Affin-UOB Securities, said: 'We're now seeing some glimmer of hope.' What is more, there is mounting hope the economy will bottom out and start to recover in the first half of next year, bringing a quick end to the country's recession. Standard & Poor's MMS International analyst Sani Hamid said: 'There are small leakages here and there, but on the whole the currency controls are working.' Domestic demand, especially for cars, has picked up and fresh bank lending has gained momentum. In his inaugural budget as finance minister on Friday, Mohamad Mahathir forecast an end to the country's recession next year with 1 per cent growth in gross domestic product. However, a contraction of about 4.8 per cent this year is inevitable. Capital controls, which pegged the ringgit at M$3.80 to the US dollar, forced M$6.4 billion (about HK$13.04 billion) of offshore ringgit savings to return as of October 8, flushing the domestic banking system with liquidity. At the same time, government measures to recapitalise banks and help relieve private sector companies of non-performing debts are under way. Dresdner Kleinwort Benson said the next two to three months would be critical. It warned that Malaysia's efforts to reflate its economy behind the protective walls of capital controls had six to nine months to show results, otherwise leakage could undermine the economy. 'If reflation can create investment opportunities locally, there will be less reason for capital flight,' Dresdner said in its latest Asian Quarterly Outlook. It also argued that confidence would be critical to the controls' chances of success. Dr Mahathir still has some way to go on this count, according to recent research by the Malaysian Institute of Economic Research (Mier). Two surveys by it showed no pick-up in business and consumer confidence in the third quarter. Mier executive director Mohamad Ariff said: 'Firms in the manufacturing sector are still cautious in their outlook and consumers are still not showing any rigorous signs of a rebound in sentiments.' Private sector GDP forecasts for next year vary widely, from minus 3 per cent to plus 5 per cent, although more and more economists are upgrading their projections into positive territory. A lot hinges on the external environment and Malaysia's ability to export. Mr Sani said: 'The macroeconomic figures will probably show some growth next year. But the problem is whether that growth will be of quality.' Neil Saker, chief regional economist at SG Securities, said: 'The policy-makers are clearly seeing the crisis as cyclical rather than structural. 'The risk is that the programme will be no more than a sweeping of problems under the carpet while structural issues continue to mount.'