The consultancy, which also publishes reports on the risk ratings of other Asian countries, said it is “probable” that no other Asian country is suffering from as much bad press as Malaysia. Among the developments that caught its attention were the theft of military jet engines, detention of terror suspects from a number of African and Middle East countries following warnings that Islamic militants were planning attacks on foreigners at resorts in Sabah, renewed ethnic and religious “violence” that included arson at some churches and desecration of mosques, and controversy over the integrity of key institutions like the judicial system in the sodomy trial of opposition leader Datuk Seri Anwar Ibrahim.

“Events of the past month give the impression that pressures are building and the entire situation is becoming much more unstable,” said PERC.

The report noted that the government is blaming the international media for exaggerated reporting and Prime Minister Datuk Seri Najib Razak had argued that the focus should not be on the fringe groups that are causing problems but on the majority of Malaysians who are coming together to condemn the recent acts of violence following the ‘Allah’ controversy. But PERC maintained that the root of the problem was a vocal minority that is dominating the national agenda.

“Mr. Razak’s attempt to put the best spin on a bad situation is understandable. He is fighting for his political life and is trying to stop the erosion in confidence in Malaysia’s prospects,” said PERC. “However, he is wrong in saying that Malaysia is being defined by the way the majority of the population are coming together. It is being defined by the ability of a minority to dominate the political agenda, shaping policy and compromising the reputation of key institutions in ways that hurt Malaysia’s reputation as a stable, attractive place for foreign investors.”

The report also said that while Islamic activists which are “threatening Malaysia’s secular credentials” are getting the widest coverage, it was the Umno elites, described as “a fringe group of insiders who have been able to profit disproportionately from the policies of the ruling coalition” that deserved the most attention.

“They are threatened with a loss of political power that could also impinge directly on their substantialbusiness interests. Malaysia’s future will be determined largely by the tactics this group of insider elites resort to in order to stay in power and the success of those tactics. Their commitment to democracy is a major question mark. If they blatantly manipulate the system in order to remain in power, the public backlash could be worse than anything Malaysia has seen in its modern history.”

PERC added Najib’s strategy is looking “increasingly unworkable” as a way to defuse pressures in the country.

“He is trying to be all things to all people, but in the end he might satisfy no one,” it noted.

Malaysia’s risk index as calculated by PERC rose slightly from 5.24 out of a possible maximum score of 10 in December to 5.4 in January. It however, remained well below the risk index in January last year which stood at 6.42. Countries that score higher on the index are deemed to have a higher level of risk.

The PERC report comes as the Najib administration is grappling with a budget deficit and is trying to formulate a new economic model in which private investment plays a bigger role in driving the economy towards developed status.

The consultancy pointed out however that even if the opposition were to be in charge come the next election, foreign investors and others would wait and see if the opposition could govern the country effectively.

“So far the only thing uniting these (opposition) parties is their opposition to the ruling coalition, not matters like dealing with Malay entitlements, the extent that there should or should not be a broader Islamisation of Malaysia, or an economic programme for promoting the country’s development,” said PERC.

PERC maintained in its report that foreign investments into Malaysia have not been forthcoming, either in direct form or in the equity markets.