The fate of Anwar Ibrahim, the leader of the opposition party, Pakatan Rakyat, could spark large-scale social unrest in Kuala Lumpur, the capital, which could spread to other major cities on peninsular Malaysia.

The Economist Commentary

The fate of Anwar Ibrahim, the leader of the opposition party, Pakatan Rakyat, could spark large-scale social unrest in Kuala Lumpur, the capital, which could spread to other major cities on peninsular Malaysia.

Anwar faces a trial over sodomy charges brought by a former aide. He continues to claim that the charges are politically motivated, and have been made to thwart his attempts at trying to form a new government. If found guilty, his supporters are likely to take to the streets and the crowds could swell to thousands, similar to the size seen in the late 1990s when he was convicted for sodomy and corruption.

Unlike then, the mobilisation of new sources of media by opposition supporters, could lead to a prolonged campaign. As a result, we have increased the political stability risk score by five points, from 35 to 40.

We have raised the score for the legal and regulatory risk category by two points, to 40. Although the government cut the subsidy on fuel prices in June 2008, it appears determined to maintain this and the subsidy on a range of basic items.

There have been opposing movements in the underlying indicators of the macroeconomic risk category. As a result, the category score remains the same, at 15.

On the one hand, real GDP is expected to slow to 3.1% in 2009, as economic growth in Malaysia's major export markets slows significantly in that year. Growth is expected to remain sluggish in 2010. On the other hand, the government has been cutting the administered price of fuel in recent months and is expected to continue this trend over the short term as international oil prices continue to fall.

Weak domestic demand coupled with persistent falls in the price of commodities, non-commodities and industrial raw materials will exert downward pressure on overall consumer prices. We expect consumer price inflation to average 2.4% in 2009.

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