Mahathir's real target Malaysian policy

KUALA LUMPUR, Aug 15 (Reuters) Malaysians are witnessing a row between past and present leaders with fascination, dread and one burning question: will it end with the incumbent's downfall? Political analysts don't rule it out but say the first victim of former leader Mahathir Mohamad's wrath is plain to see -- government policy.

From the moment Mahathir broke cover, emerging last year from a busy but quiet retirement to attack auto policy, his successor Abdullah Ahmad Badawi's government has made small policy shifts.

''He's trying to please as many people as possible,'' said Winson Fong, Singapore-based chief investment officer of SG Asset Management, referring to Abdullah's growing spending plans, the most obvious shift in recent months.

Egged on by Mahathir, elements of the main ruling party are piling pressure on Abdullah to drop his more frugal approach to state spending and return to the Mahathir era of mega-projects.

''I have not won a single contract from the government so far this year,'' said builder Ismail Yusof, an ethnic Malay who relies purely on government projects and is a supporter of the ruling party, the United Malays National Organisation (UMNO).

''And I'm counting losses,'' added Ismail, who is based in Mahathir's home state of Kedah.

Mahathir, a hero of UMNO and Malaysia longest-serving leader, has criticised Abdullah's decision to shelve major state projects that had been planned by Mahathir before he retired in late 2003.

These include a new bridge to Singapore, a major rail project and a slow-down in development of Mahathir's biggest single state project, the new administrative capital of Putrajaya.

Mahathir's criticism is resonating within UMNO, which has close links with the construction sector and has been stung by the slowdown in state pump-priming.

''He had managed the country for 22 years and there are certain things that he feels are not right,'' said Mahathir's son, Mukhriz Mahathir, who is a senior member of UMNO's youth wing.

The government denies Mahathir's criticisms are influencing policy. But the former leader's comments have turned low-level grumbling within UMNO into pockets of open dissent, creating an atmosphere where prudent fiscal policy is difficult to sell.

''A lot of people lose out and presumably a lot of these people have been going to Mahathir and crying in his office,'' said one political analyst who declined to be named.

SCROOGE NO LONGER Cabinet minister Mohamed Nazri Abdul Aziz has said he fears Mahathir is out to topple Abdullah, but no one expects Mahathir to make a political comeback and there are no moves inside UMNO to unseat Abdullah, buoyed by a big electoral win in 2004.

But fiscal policy is feeling the heat, not just from the political fire Mahathir has started, but also from a sluggish economy, rising costs and a stronger currency.

Abdullah has proposed an ambitious 2,200-sq-km development in southern Johor state, including an industrial zone, waterfront city, theme park, medical hub and new state administrative centre.

The private sector alone is expected to contribute 4 billion dollars for the development. Malaysia has also talked of a Disney theme park in Johor as well as a possible 2.2 billion dollars bullet train which would hurtle between Kuala Lumpur and Singapore.

The government is also expected to hand down an expansionary 2007 budget early next month, analysts said.

Government talk of eliminating Malaysia's chronic budget deficit has faded.

Abdullah plans to cut the budget deficit to 3.5 per cent of gross domestic product this year from 3.8 per cent in 2005.

But the government recently suggested this burden would not shrink much further in 2007, saying 3-3.5 per cent could be sustained for an indefinite period before moving into balance.

REUTERS MS BST1304