Q+A-Why the poll in Malaysia's Sarawak state matters

KUALA LUMPUR, March 19 Sat Mar 19, 2011 7:27am EDT

KUALA LUMPUR, March 19 (Reuters) - The chief of Malaysia's key Sarawak state said the local assembly would be dissolved on Monday, paving the way for polls that could trigger an early general election.

The vote in the sprawling, resource-rich state on Borneo island is seen as a barometer of the strength of Prime Minister Najib Razak's government, and is expected to influence the timing and outcome of a general election which could be held this year.

The Sarawak election must be within 60 days of the legislature's dissolution.

WHY DOES SARAWAK MATTER?

Sarawak, Malaysia's largest state, is a bastion of Najib's National Front. The state provides the ruling coalition with one-fifth of its 137 members in parliament and the outcome in local assembly elections will provide a reading on where the Front now stands.

The coalition suffered record losses to the opposition in the last general election in 2008. But analysts say record commodity prices and strong economic growth have boosted the Front's chances at national polls that must be held by 2013.

In a recent interview with Reuters, Najib said a good showing in Sarawak would help assess the public mood and perhaps provide a pointer to bringing forward the date of the general election.

The ruling coalition is unlikely to lose control of the state but voters could show their displeasure with long-serving Chief Minister Abdul Taib Mahmud and deprive the Front of its two-thirds majority in the state assembly.

Many of Malaysia's mainly ethnic Chinese and Indian minorities abandoned the government in the 2008 elections due to increasing concerns of marginalisation, hollowing out the ruling coalition's smaller parties. Many remain weak and unable to regain momentum. Sarawak will show whether Najib has succeeded in winning them back.

WHAT IF THE RULING COALITION FAILS TO RETAIN ITS MAJORITY?

This could force Najib to hold off on calling a snap election and pressure him to further delay promised economic reforms that would affect the government's plans to trim its budget deficit, which hit a 20-year year high in 2009.

Since taking office in 2009, Najib has pledged political and economic changes that were initially cheered by investors.

But he has since shied away from significant subsidy cuts and tax reforms, and softened his stance on a pledge to reform controversial preferential equity ownership rules for the majority ethnic Malays.

A poor showing by the government in Sarawak would signal that Najib still has an uphill battle to reverse the ruling coalition's 2008 general election losses.

A unconvincing win by the ruling coalition could also increase pressure on the state's 74-year-old chief minister Taib to retire, leaving a power vacuum which could unnerve investors.

HOW WILL INVESTORS REACT?

Foreign ownership of Malaysian stocks stood at only 21.9 percent as of December last year and the stock market reaction to previous Sarawak elections has generally been limited.

The last Sarawak election in 2006, which saw the opposition increase its tally in the 71-seat state legislature to eight from two, was followed by a two percent drop in the benchmark stock index .

If the government loses its two-thirds majority in Sarawak, this could heighten political uncertainties for investors in the state, which include power generation firms Aluminium Corp of China Limited , State Grid Corp of China and Tokuyama Corp .

These companies are mainly involved in aluminium smelter projects in the state and their investments contributed to making Sarawak the top choice for investors in Malaysia in 2008 and 2009, according to government data.

In the interview with Reuters, Najib said that he was looking to revive hopes for a $2 billion aluminium smelter in Sarawak proposed almost four years ago by Anglo-Australian miner Rio Tinto .

Najib said the smelter was still on the drawing board and that the project hinged on talks over power prices, which could begin with the company as early as this year. (Editing by Liau Y-Sing and Miral Fahmy)