Singapore: Singapore will celebrate its 37th birthday this week with an extra lift from a rebound from its worst economic slump and a renewed sense of political assertiveness in the region.

The Monetary Authority of Singapore said gross domestic product (GDP) was on course to reach the upper end of the official forecast of two to four per cent growth in 2002, capping a recovery from a two per cent contraction in 2001.

On the political front, the tiny South East Asian state has sent a clear message to Malaysia that it was capable of some day meeting its own water needs and ending dependence on supplies piped in from its larger neighbour.

Water is a precious strategic commodity in affluent but resource-starved Singapore, which recently unveiled its capability to make waste water potable using the latest technology.

To prove the point, Prime Minister Goh Chok Tong last week made a big splash by publicly drinking recycled water, called Newater, ahead of National Day celebrations marking separation from Malaysia on August 9, 1965.

"We now have our own water," Goh declared.

Singapore relies on Malaysia for half its daily water needs and vows to develop alternative sources if it cannot strike new long-term deals with Kuala Lumpur, where Singapore's critics periodically threaten to close the tap during frequent bilateral spats.

However, amid the fanfare, officials and analysts say Singapore must face up to new challenges.

A key one is managing the social transition as the government seeks to revamp the manufacturing-driven economy to tackle rising competition, particularly from Malaysia and China, which enjoy lower costs.

Another challenge lies in pushing the country up the economic ladder by expanding into new growth sectors requiring specialised skills, such as the biomedical and life sciences, from the current industrial base dominated by electronics.

"Basically the main challenge is to re-engineer up the product chain and the second is to manage the process and make it as painless as possible," said.