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FACTBOX-Five political risks to watch in Malaysia

 KUALA LUMPUR, Dec 15 (Reuters) - Political risk has risen
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 political
tension.
 -- What happens in a leadership tussle in the Malaysian
Chinese Association, the second biggest party in the National
Front.
 * 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 previous
year.
 * 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 the
region.
 (Compiled by Andrew Marshall and Kuala Lumpur bureau)

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