Five risks to watch in Malaysia

Oct 2 (Reuters) - Malaysia's ruling United Malays National Organisation holds its annual meeting this month in a turbulent political climate for a coalition that has had 52 years in power.

Following is a summary of key Malaysia risks to watch:

* POLITICAL CONFLICT

Prime Minister Najib Razak is trying to assert his authority on the ruling coalition and stop the opposition from engineering a change in government. The National Front 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 Chinese and Indian ethnic minorities, abandoned the National Front in favour of former Deputy Prime Minister Anwar Ibrahim's opposition. The political situation is likely to remain fluid, and 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:

-- Najib will be looking to retain a state seat in Negeri Sembilan in an Oct. 11 by-election to give him a stronger hand in pushing forward reforms to UMNO at its Oct. 12 annual meeting. A drift away from reform pledges by UMNO, would worry investors.

-- The Malaysian Chinese Association, the second-biggest party in Najib's coalition, holds an extraordinary meeting for a confidence vote on its president on Oct. 10. Divisions in the MCA are a further headache for Najib's efforts to bolster support.

* 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 action policy, including relaxing a rule that companies must offer stakes to indigenous ethnic Malays. Despite the moves, Najib is wary of upsetting 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 announcements. Markets will react negatively if Najib appears to be backing away from reform. Portfolio investors MYFLOW=ECI have pulled out of Malaysia and show few signs of coming back and really want to see reforms being executed rather than just promises.

* 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 of the government 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.

* 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 that the insurgency is becoming more of a political issue in Malaysia.

-- Any evidence al Qaeda is gaining traction in the region.


( Source )