Malaysia by-election campaign starts in key Borneo state

KUALA LUMPUR (Reuters) - Campaigning began on Saturday for a Malaysian by-election in a government stronghold state whose outcome could boost Prime Minister Najib Razak's confidence to call snap national polls as early as next year.

The race for the mainly urban and ethnic Chinese parliament seat of Sibu in the timber and resource rich Borneo state of Sarawak pits a party in Najib's National Front coalition against the opposition Democratic Action Party (DAP).

The May 16 vote will not alter the balance of power but Najib's ability to reverse the coalition's record losses in the last general election in 2008 will require strong support in Sarawak, which provides it with 30 of its 137 seats in parliament.

Analysts say a strong government win in Sibu could embolden Najib to call for state-wide elections in Sarawak by the end of this year followed soon after by general elections, which do not have to be held until 2013.

An opposition win in Sibu would help the People's Alliance grouping, of which the DAP is a member, remain on track as a contender to wrest federal power after a series of recent setbacks including the resignation of four of its MPs.

VOTING TREND

"Sibu will be an indicator of the voting trend in the upcoming Sarawak state election. If the opposition wins the seat by a big margin it will be a big worry for Najib going ahead," said James Chin, a politics professor at Monash University in Kuala Lumpur.

Najib took office in April last year pledging economic and political reforms to woo lagging investment and turn back his ailing coalition from the 2008 polls losses. [ID:nSGE62T035]

The National Front, which has ruled the Southeast Asian country uninterrupted for 52 years since Independence from Britain in 1957, lost control in five of Malaysia's 13 states and its once iron clad two-thirds control of parliament.

The uncertainties have helped dent foreign investment, with net portfolio and direct investment outflows reaching $61 billion in 2008 and 2009 according to official data.

Retention improved this year, mainly into a bond market fuelled by a Malaysian interest rate hike and the use of the ringgit as a proxy for a possible Chinese yuan revaluation, although Malaysian assets have been hit by risk aversion due to investor fears that Greece may default.

Political tensions in Malaysia are also being fueled by opposition leader Anwar Ibrahim's ongoing trial for sodomy that resumes next week and which he says is a political conspiracy. [ID:nSGE6430A0]

A contentious verdict in the trial that ends late August could anger his supporters and lead to a repeat of the street demonstrations that rocked the capital following Anwar's sacking as Deputy Prime Minister in 1998, political analysts have said.

(Editing by David Fox)