Malaysia’s ruling coalition suffered a humiliating setback in the March 8 polls, losing a two-thirds parliamentary majority for the first time in 40 years and yielding control of an unprecedented five of the nation’s 13 states.

But in an apparent tit-for-tat, Prime Minister Abdullah Ahmad Badawi’s government is refusing to disburse development and tourism funds directly through the five opposition-controlled state governments.

Some state welfare funds have also been stripped off and discreetly transferred to a national association comprising wives of federal ministers, opposition leaders said. Abdullah’s government is reviewing key infrastructure projects approved earlier in those states, adding further risks to investors. The opposition, accusing the government of being a sore-loser, has meanwhile complained that some official files, money and even furniture, have gone missing.

“Perhaps the biggest risk is that the government starts to undermine state governments controlled by the opposition,” global banking giant HSBC said in a research report on Malaysia. “There are some signs that this is already happening.”

Some would-be foreign investors are already skipping the industrial states of Penang and Selangor, two of the five states ruled by the opposition, due to political concerns, one Asian diplomat said.

This is a worrying sign for the slowing economy, reeling from a possible global slowdown and soaring energy and food prices.

The stock market, which has gradually recouped all its losses since the elections, isn’t going anywhere now due to what one top brokerage house called overhanging political uncertainty. “We remain neutral on Malaysian equities,” the brokerage said in a report released last week.

Analysts said holding back big construction projects could scuttle the economy, where growth is seen slowing to 5-6 percent this year from 6.3 percent in 2007.

A leading banker drew parallels with Thailand where prolonged political uncertainty has hurt consumer sentiment in the country.

“We hope the political landscape clears up quickly,” said Nazir Razak, head of the country’s second-largest banking group, CIMB “I think a lot of business people are saying now they are anxious to put the political environment to bed so that we can get on with business.”

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