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 petrol price hikes aimed at cutting its subsidy bill and electricity price rises. 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, senior economist at CLSA. 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 premier last April, replacing the man who in 2008 led the National Front government to its worst ever election results, he pledged to soothe battered relations between Malaysia's races and to speed economic reforms. “What Najib is now doing is backing away from reforms to consolidate his power base,” said Bridget Welsh, a Malaysia expert at Singapore Management University. Najib's United Malays National Organization faces a growing challenge from the opposition Pan Malaysian Islamic Party (PAS). 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 Island, 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. “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, 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 last week, neighboring Indonesia has seen investment surge. The Malaysia data comprises portfolio and direct investment and “other” flows, according to the Statistical Office. Even though economists say that as one of Asia's largest bond markets Malaysia was bound to be hit by a wave of selling during the global financial crisis, outflows have continued in 2009. “Najib needs to bring in foreign investment to move Malaysia from a middle income country that is dependent on commodities and electronics exports to a more robust economy,” said Singapore Management University's Welsh.
