| KUALA LUMPUR
KUALA LUMPUR Malaysia's opposition won a key by-election in Sarawak state on Borneo island on Sunday, albeit with a narrow majority, that showed the government had failed to win back ethnic Chinese voters.
The opposition took the Sibu seat with a majority of 398 from the National Front coalition that has ruled Malaysia for 52 years in a boost that came after a wave of defections and as its leader Anwar Ibrahim stood trial for sodomy.
Sibu is around 60 percent ethnic Chinese in a Southeast Asian country where they account for 25 percent of the 28 million population that is mainly ethnic Malay and Muslim.
"It is too early to say that the opposition can win Sarawak and (neighbouring) Sabah (states), but this election has opened up the possibility of national power for them," said Bridget Welsh, a Malaysia expert at Singapore Management University.
The by-election election saw millions of dollars of spending promises from Prime Minister Najib Razak as the government fought to hold a seat in a state that provides almost a quarter of its MPs and where local polls are due this year.
The vote was a referendum on powerful Sarawak state Chief Minister Abdul Taib Mahmud who has been in power since 1981. Mahmud, whose business interests dominate the state, will probably be forced from office, political analysts said.
It was also fought against a backdrop of rising ethnic tensions with the government seeking to stop Christians, many of whom live in Borneo, from using the word "Allah" for their god, saying it is offensive to Muslims.
Sarawak and neighbouring Sabah state gave the government 54 of its 137 parliamentary seats in the 2008 general election.
They provided a bulwark against opposition gains in mainland Malaysia in national and state polls in 2008 when the National Front lost its two-thirds parliamentary majority and control of five of Malaysia's 13 states in its worst ever election results.
NAJIB'S REFORM AGENDA
Najib has pledged to deliver a "New Economic Model" to boost competitiveness, including dismantling costly subsidy regimes for petrol and food which helped push the budget deficit to a more than 20-year high of 7.4 percent of gross domestic product in 2009.
However, the government has backed off changes that could hit the poorer Malays who account for 55 percent of the population and are its core voter base.
Political uncertainty since the 2008 polls has dented foreign investment at a time when the global economy was also hit by the U.S. sub-prime mortgage crisis.
Net portfolio and direct investment outflows hit $61 billion in 2008 and 2009 according to official data, although money came back into the bond market this year fuelled by two Malaysian interest rate hikes and the use of the ringgit as a proxy for a possible Chinese yuan revaluation.
Najib's government is currently considering new measures to cut subsidies, but with state polls looming in Sarawak this year and rising Malay anger against reforms, it may back away again, fearing a voter backlash.
"I suspect that we are not going to see full implementation of Najib's New Economic Model until he has won a national mandate," said James Chin, professor of politics at the Monash University campus in Kuala Lumpur.
(Editing by Jon Boyle)