Sales of new motor vehicles in Malaysia, southeast Asia’s biggest passenger car market, are expected to recover 3.8% this year after a sharp fall in 2006, a report said on Thursday.

A Frost & Sullivan report cited by The Associated Press (AP) projects sales last year dropped 11.5% to 487,500 units from a record 551,042 units in 2005 due to higher interest rates, lower resale value for used cars, the oil price hike and tougher bank credit rules.

But sales will pick up to 506,200 units this year as consumer sentiment improves and banks become more aggressive in issuing loans especially to first-time buyers, Kavan Mukhtyar, head of the US-based consultancy’s Asia-Pacific auto division told the news agency.

Mukhtyar was also reported to have said that young adults entering the work force will fuel demand for passenger cars while anticipation of new model launches, especially affordable fuel-efficient cars, will boost the market.

The Frost & Sullivan analyst also reportedly said national carmaker Proton‘s share market will likely deteriorate further this year as rivals such as Honda and Hyundai become more aggressive in pricing terms.

“Car buyers will return to the market as they adjust to market conditions. The key to sales in 2007 is affordability, low maintenance cost and driving comfort,” he told the Associated Press. “Japanese and Korean makers are expected to make a big impact in the mid-car segment.”

For the first 11 months of 2006, vehicle sales in Malaysia fell 9.9% on-year to 454,013 units. Full year figures are not yet available, the report said.