Five major challenges facing Malaysia's PM

(Reuters) - Malaysian Prime Minister Abdullah Ahmad Badawi, fighting for his political survival since an election in March, is now weathering a storm over a steep rise in fuel prices that some say may hasten his departure.

Burdened by a soaring subsidy bill, his government raised petrol prices by 41 percent last week in a politically unpopular move that could drive inflation to a 10-year high and slow economic growth.

Following are five major challenges facing Abdullah:

ANTI-FUEL PROTESTS

- Abdullah's administration faces an acid test to quell mounting anger and, possibly, more organised street protests over the fuel price hikes.

The opposition, emboldened after a good showing in March elections, has proposed bringing 100,000 people to the city centre on July 12 to protest against the fuel hike.

This could be the country's biggest anti-government protest ever, but whether it is allowed to take place remains to be seen. Malaysia bans gatherings of five or more people without a police permit.

ECONOMIC TEST

- Abdullah, who is also the Finance Minister, will present the 2009 national budget in parliament on Aug. 29. His faces a delicate task of trying to appease voters with generous tax cuts while keeping a tight rein on the fiscal deficit.

PERCEPTION PROBLEM

- Even before the March election debacle, Abdullah was perceived to be suffering from a credibility problem after flip-flops over policy decisions.

These included the scrapping of a plan to replace Malaysia's side of the causeway to Singapore, drawing a sharp rebuke from ex-premier Mahathir Mohamad and costing the government millions of dollars in compensation to the contractor.

In addition, a ban on the sale of petrol and diesel to foreign motorists at the borders was lifted, days after it was announced last month.

"No one seems to believe him anymore," said one political analyst who declined to be named.

LEADERSHIP TEST

- Former prime minister Mahathir Mahathir Mohamad's shock resignation from United Malays National Organisation (UMNO) and his call for Abdullah to resign late last month has prompted speculation that festering rifts in the party could widen and speed up the premier's exit.

Abdullah has said he would defend his post as leader of UMNO at party elections in December. A win will mean that he remains prime minister.

In a face-saving measure, Abdullah could quietly arrange to hand power over to his stated successor, Deputy Prime Minister Najib Razak, to avoid a humiliating defeat at the December party polls.

THE ANWAR FACTOR

- Opposition leader Anwar Ibrahim's claim that the opposition coalition would be capable of forming the next government by mid-September will continue to unsettle Abdullah.

Anwar has said he has enough lawmakers to topple the government following the March election and was waiting for the right moment.

(Reporting by Jalil Hamid; Editing by Sanjeev Miglani and David Fox)