The decision by the Sabah Progressive PartyÆs two parliamentarians to leave the coalition is an unprecedented move in Malaysian politics. No member of the ruling 14-party BN coalition has ever defected in the coalitionÆs 39 years of leadership.
WednesdayÆs move is the latest in a series of political blows to BNÆs leadership since the coalition lost its two-thirds majority in the March 8 elections.
So far, the countryÆs economic indicators have remained strong and according to Bank Negara Malaysia, MalaysiaÆs central bank, the ringgit closed up less than 1% against the dollar at M$3.4470 on September 17. As of August 29, the latest available date, Bank Negara had M$400.2 billion ($122.6 billion) in foreign reserves.
But observers argue that a prolonged lack of political certainty will not go unnoticed.
Standard & PoorÆs equity research vice-president and head of research, Lorraine Tan, says that while the rating agency believes Malaysia is ôfundamentally attractiveö, the continuation of political uncertainty is ôweighing on sentiment (and) raising risk perceptionö.
Since the beginning of MalaysiaÆs political woes, the business community has indicated its desire for the government, regardless of party, to continue with its current policy mix.
ôBusinesses [in Malaysia] want stability, including political, economic and medium- to long-term guarantees,ö explains Standard & PoorÆs analyst Takahira Ogawa.
In the second quarter, the latest period for which numbers are available, the country's GDP grew 6.3% year-on-year to M$188.8 billion ($54.66 billion). However, in July year-on-year industrial production growth slowed to 1.8% from 2.2% in June. At the same time, the consumer price index rose to 8.5% year-on-year from 7.7% a month earlier.
ôThe longer the political impasse is prolonged, the greater the potential for a more significant deterioration in the economic outlook,ö says Tan.
The failure by opposition coalition Pakatan RakyatÆs leader Anwar Ibrahim to form a new government on Tuesday and Sabah Progressive PartyÆs defection from BN on Wednesday came on the back of a politically charged summer. Leading headlines this July and August were AnwarÆs arrest for sodomy charges and, following his release on bail, his re-election to parliament after a 10-year absence. Upon his re-election, Anwar pledged to fulfil his April promise to form a government by September 16 to call a vote of confidence to challenge the BN coalition government of Prime Minister Abdullah Ahmad Badawi.
While the passing of AnwarÆs self-appointed September 16 deadline initially raised doubts as to his political support, the Sabah Progressive PartyÆs defection from BN has lent credibility to AnwarÆs push for a new government.
Out of a total of 222 parliamentary seats, BN currently holds 140 seats and AnwarÆs Pakatan Rakyat coalition has 80. In order to form a new government, Anwar needs 30 parliamentarians to break with BN. Such a break is likely to occur along ethnic lines among BNÆs other non-Malay parties. BNÆs leading party is the ethnic-Malay United Malays National Organisation (UMNO) party.
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