Dec 17, 2009

Five political risks to watch in Malaysia

The Parliament building in Kuala Lumpur

Bursa Malaysia

Political risk has rise in Malaysia in recent years, with the ruling coalition more vulnerable than it has been for decades.

Following is a summary of key Malaysia risks to watch:

* POLITICAL CONFLICT

Prime Minister Najib Razak forestalled attempts last year by the opposition to engineer a change in government but faces a tough task to rebuild his 13-party coalition. The National Front which has ruled Malaysia for 52 years recorded its worst defeats in last year's general election, losing control in five states and its once iron-clad two-thirds control of parliament. Voters, especially the country's Chinese and Indian ethnic minorities, abandoned the National Front in favour of former Deputy Prime Minister Anwar Ibrahim's three-party opposition. Although the political situation has stabilised, the trial of Anwar on renewed sodomy charges will provide a flashpoint. Malaysia's political stability has deteriorated significantly over recent years, and investment will be further damaged if that trend continues.

Key issues to watch:

-- The High Court has rejected Anwar's efforts to get sodomy charges dropped, and fixed the trial date for Jan. 25 to Feb. 25. The trial is likely to further inflame politicaltension.

-- What happens in a leadership tussle in the Malaysian Chinese Association, the second biggest party in the NationalFront.

* ECONOMIC REFORM

The government has promised further economic reform to attract increased foreign investment. Najib has rolled back elements of a four-decades old Malay affirmative policy, relaxing the rule that companies must offer stakes to indigenous ethnic Malays. Despite the moves, Najib is wary of upsetting the Malays, a critical vote bank, and treads carefully on economic reform. This may cause him to dilute or abandon his plans as he attempts to remain in power.

Key issues to watch:

-- Government policy implentation and announcements. A further set of liberalisation has been trailed by the government, although while investors have greeted positively measures so far, little money has flowed into Malaysia's markets as they are wary over implementation.

* RACE AND RELIGION

Race and religion have always been explosive issues in Malaysian politics, and although Najib took power pledging a more inclusive approach to ethnic Chinese and Indian minorities, UMNO may cast this approach aside to try to prevent further loss of support amongst its Malay powerbase.

Key issues to watch:

-- If the government tries to woo Muslim voters with more conservative policies based on Islam, investors may be spooked.

* CORRUPTION

Malaysia used to be regarded as one of the region's more reliable countries but worsening corruption and a perceived lack of judicial independence have damaged investment. UMNO's policy of handing out government contracts to what critics say are cronies under a long-entrenched system of patronage within the party has hit Malaysia's competitiveness.

Key issues to watch:

-- How Najib handles the dilemma of bolstering his core support bloc while also cracking down on corruption. Investors are watching to see whether promised reform materialises.

-- Indicators gauging corruption in Malaysia. Transparency International's 2009 Corruption Perceptions Index, released last month, saw a significant deterioration in Malaysia's ranking to 56th out of 180 countries from 47th the previousyear.

* SECURITY

The insurgency in southern Thailand has implications for Malaysia, particularly if it starts to draw more attention and sympathy from Malaysians for the ethnic Malay fighters across the border. A less likely danger is that al Qaeda-linked groups manage to establish a foothold in the area.

Key issues to watch:

-- Signs the insurgency is becoming more of a political issue in Malaysia.

-- Any evidence al Qaeda is gaining traction in theregion.

source : reuters