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Kuala Lumpur. Buoyed by strong oil prices and the prospect of 5 percent economic growth this year, Malaysia’s government has backed off unpopular reforms, fearing a backlash that could end its 52-year monopoly on power.

At the weekend the government abandoned plans to introduce a goods and services tax just weeks after it halted implementation of fuel price hikes that would have cut a subsidies bill, and electricity price increases.

In all three cases it cited the need to “engage with the public,” a message that may derail Malaysia’s bid to reverse investment outflows and tackle a budget deficit that has overshot its targets since 2007 to hit a more than 20-year high of 7.4 percent of gross domestic product in 2009.

“They have obviously got a huge deficit building up and so the fact that they’re delaying fiscal management at the expense of looking at the elections will obviously not be taken that well by the markets,” said Anthony Nafte, a senior economist at CLSA.

In the longer term, failure to implement fiscal reform leaves Malaysia, Asia’s third-most trade dependent economy, vulnerable to external economic and commodity price shocks.

When Najib Razak became prime minister in April, replacing the man who in 2008 led the National Front government to its worst-ever poll results, he pledged to soothe battered relations between Malaysia’s ethnic groups and to speed economic reforms.

A year on and amid vocal complaints by Malay Muslims, who account for 55 percent of the 28 million population, over issues like Christians’ use of the word “Allah,” that message has been diluted.

“What Najib is now doing is backing away from reforms to consolidate his power base,” said Bridget Welsh, of the Singapore Management University.

Najib’s United Malays National Organization faces a growing challenge from the opposition Pan Malaysian Islamic Party.

Elections do not have to be held until 2013, but it is increasingly likely that they could be held either in conjunction with state polls in Sarawak on Borneo, expected in the first quarter of 2011, or shortly afterwards.

Sarawak provides the National Front with 30 of its 137 MPs in a Parliament where the government lost its two-thirds majority and thus its ability to change the constitution and to redraw electoral boundaries for the first time in 2008.

Independent political analyst Ong Kian Ming calculates that UMNO won 58 percent of the Malay vote in mainland Malaysia in 2008. That is too narrow a margin to risk in any new elections and Najib will need to ensure that he is seen as a clear winner in mainland Malaysia, not just a winner in Sarawak, he said.

“I don’t think Najib will call for elections too early. As it is, he has the upper hand and by attrition and harassment he can win a lot of ground against the opposition,” said Ooi Kee Beng, a fellow at Singapore’s Institute of Southeast Asian Studies.

While Malaysia has leaked money over the past two years to the tune of $61 billion, according to government investment flow data released last week, neighboring Indonesia has seen investment surge.

In 2009, Indonesia graduated to the top of the emerging market class, joining Brazil, Russia, India and China, the so-called BRIC countries. It attracted $10 billion of portfolio investment last year.

“Najib needs to bring in FDI to move Malaysia from a middle income country that is dependent on commodities and electronics exports to a more robust economy,” Welsh said.

The traditional dynamics of the National Front are changing with UMNO’s allies still weakened by the 2008 general election when ethnic Chinese and Indian voters deserted the coalition, worried by corruption and rising sectarianism.

That has left the front more dependent than ever on UMNO which is battling an Islamist party for Malay votes. The rhetoric of some of its members has become more radical.

Recent rows over the use of “Allah” by Christians, attacks on churches and battles over conversions and the spread of Shariah law have provided a rallying point for conservatives within UMNO.

“UMNO has always been a party that is supposed to build the nation, but at the same time it is highly conservative where its power base and its ideology are concerned,” Ooi said.

“If there are elections soon, then the issue of Islam and ‘Malay Supremacy’ will be the rallying cry for UMNO. UMNO will go out fully as a racialist party. The risk is that it will cost its allies even more seats.”



Reuters