Key political risks to watch in Malaysia

Najib is widely expected to win the election, but further gains by the opposition would undermine his standing within the dominant Umno.

By Stuart Grudgings

KUALA LUMPUR: Prime Minister Najib Tun Razak is widely expected to call national elections in the first half of 2012, aiming to win a fresh mandate while economic growth remains relatively strong and before a looming global slowdown jeopardises his chances.

Economic growth is expected to slow to a rate of 4-5 percent this year as exports suffer, the central bank said in March. Last year it expanded by 5.1 percent, more slowly than the previous year, but still slightly better than expectations.

The election promises to be the most fiercely fought in Malaysia’s history, and the January acquittal of charismatic opposition leader Anwar Ibrahim of sodomy charges has added to the unpredictability of the outcome.

The polls will be a test of whether Najib’s gradual efforts to reform the state-heavy economy and its race-based political system are enough to restore the ruling coalition’s prized two-thirds majority in parliament.

Najib is widely expected to win the election, but further gains by the opposition would undermine his standing within the dominant Umno and could prompt a leadership challenge from a more conservative, less reformist candidate.

Following is a summary of key Malaysia risks to watch:

In March, Malaysia’s cabinet approved a national minimum wage for the first time in the country’s history, a clear sign Najib is positioning himself for a vote.

An opinion poll published in early March said support for him rose to 69 percent early 2012, from 59 percent last August.

The surprise high court acquittal of former deputy prime minister Anwar in January has given the opposition a formidable campaigner and eloquent critic of the government. But the impact of his freedom is not clear-cut — some analysts say it could help Najib by undermining the opposition’s claims that the judiciary is controlled by the government.

Najib has tried to claim the reformist mantle as Umno struggles to retain support among young, urban voters but he faces resistance from conservative elements within Umno who are loathe to give up affirmative action benefits for ethnic Malays.

Najib pledged to repeal two notorious security laws last year, following the government’s heavy-handed response to street protests demanding electoral reform in July, but he has yet to replace them with new legislation. A new bill that bans street protests has cast serious doubt on his reformist credentials.

A crucial gauge of his ability to reform the political system will be proposed changes to the electoral system that the opposition says is weighted in favour of the government.

The three-party opposition alliance says it aims to campaign more strongly among ethnic Malays in rural areas, where support for Umno remains strong, and to focus on recent corruption allegations against government officials.

Religious tensions are also a concern. In late October, about 2,000 Malaysian Muslims gathered near the capital to denounce alleged Christian attempts to convert Muslims, widening a religious rift that could cost Najib minority votes.

Political uncertainty has weighed on foreign investment since 2008 but speculative inflows in search of higher-yielding markets have boosted the ringgit currency.

What to watch:

Clues about the timing of the election, which must be called by March 2013. Signs that the global economy is deteriorating more rapidly could prompt Najib to rush to the polls before Malaysians feel the pain from a slowdown. Another reason for calling the election earlier would be to get in ahead of Umno’sinternal elections which will are likely to be held in the second half of 2012.

The risk of more protests, and government response to them, as well as racial and religious relations. Najib is trying to reach out to non-Muslim minorities who make up about 40 percent of the population. Last year, he set up diplomatic ties with the Vatican in a bid to win Christian support.

Resistance to reform. Najib’s promise to repeal the Internal Security Act and Emergency Ordinance as well as to reform other laws to promote civil liberties has been questioned by Perkasa, an influential conservative group backed by some members of Umno.

Economic reform

A scandal over a publicly funded cattle-rearing project that the opposition says was used as a personal fund for the family of one of Najib’s ministers continues to rumble. The minister at the centre of the scandal has said she will quit, and her husband has been charged with embezzlement.

It raises the risk that elections will be delayed, and highlights Najib’s stuttering efforts to reform the corruption-prone Southeast Asian nation.

In addition, Malaysia could delay a $2-billion listing of a state-linked palm oil firm as farmers’ opposition to the deal risks undermining the ruling coalition.

Najib has pledged to reform a decades-old affirmative action policy favouring ethnic Malays and replace it with a “New Economic Model” to promote greater competition. But the prime minister has since softened his stance on reforming the policy for fear of alienating conservatives among the majority ethnic Malays who make up about 60 percent of the electorate.

Investors and the opposition complain that the race-based policy has been widely abused, fostering cronyism and leaving the economy run on patronage.

The government is implementing a $444 billion initiative, called the Economic Transformation Program, that is aimed at propelling the country to developed nation status by 2020.

The central bank has kept its benchmark interest rate on hold at 3 percent since May 2011.

In the annual economic assessment it released in March, the central bank said it expected inflation to hover within a 2.5-3 percent range, slightly lower than lat year’s 3.2 percent.

The budget deficit was expected to hit 5.4 percent in 2011 and the government expects it to fall to 4.7 percent this year. That target could be put at risk by election spending and a worse-than-expected global slump.

What to watch:

How the global slowdown affects the Malaysian economy, and how this affects development spending.

A possible rise in Malaysia’s budget deficit if the economy slows and the government ramps up spending in an election year.

-Reuters