By Stuart Grudgings
DENGKIL, Malaysia (Reuters) - Anwar Ibrahim is free and he knows how to work a crowd.
Wading into a throng of supporters at a rally near the capital Kuala Lumpur last week, the veteran Malaysian opposition leader was relishing his unexpected freedom after being acquitted on sodomy charges that could have ended his career.
Microphone in hand, he drew loud laughs and cheers as he wisecracked about government's "cronyism" and what he said were its attempts to label him a homosexual.
The high court acquittal in January of the opposition's only true unifying figure has given the three-party alliance a formidable campaigner in national elections expected within months, adding to its momentum after historic gains in 2008 elections.
Prime Minister Najib Razak is expected to call the election by June while economic growth remains relatively strong, well before his mandate ends in March 2013.
Halijah Ismael, a middle-aged woman watching from her stall selling traditional medicine, said it was time to give Anwar a chance at governing after 55 years of unbroken rule by the United Malays National Organization (UMNO) and its allies.
"Enough is enough," said Halijah, who said she used to be active in a local UMNO political group before growing disillusioned.
The polls will be a test of whether Najib's gradual efforts to reform the state-heavy economy and its race-based political system are enough to reverse 2008's shock losses that deprived the ruling coalition for the first time of its prized two-thirds majority in parliament.
Backed by UMNO's well-oiled election machine, Najib will probably win the election. The government controls most newspapers and television stations and has already started using its largesse, handing out cash payments to low-income families and raising pay and pensions for civil servants.
But the opposition and many analysts believe that weariness with the ruling coalition will enable Anwar's coalition to extend its gains from last time, when it won five state governments out of 13 and 82 seats out of 222 in the national parliament.
That could prove politically fatal for Najib by prompting powerful conservative elements in UMNO to revolt, paving a future path to power for the opposition if the government swings too far to the right.
Anwar and other opposition officials told Reuters they have a two-pronged strategy for the election. First, they will make a stronger pitch to ethnic Malays in rural areas who have traditionally supported UMNO, hammering on recent corruption allegations against government officials.
"We have learnt from our failure to get support from the rural heartland," Anwar told Reuters in an interview at his People's Justice Party headquarters on Kuala Lumpur's outskirts.
Second, they will tout what they see as economic success stories in states that have been governed by the opposition since 2008. The opposition government of Penang state in Malaysia's northwest, for example, has dismantled preferential treatment for ethnic Malays in public tenders and attracted more investments than any other state in 2010.
Anwar says he would move quickly to reform the pro-ethnic Malay affirmative action system - enshrined in the 1971 New Economic Policy - that he says unnecessarily raises tensions with minority Chinese and Indians while mostly benefiting a well-connected, wealthy few.
"We have to go down and tell the Malays that our policy, a more transparent policy, would benefit them more than the New Economic Policy that is enriching the leaders and their cronies," Anwar said.
Opinion polls show the majority of ethnic Malays support affirmative action policies, but Anwar aims to tap into a growing suspicion that the system mostly benefits elites and fuels corruption. He says he would introduce a policy based on economic need rather than race.
Malays account for about 56 percent of Malaysia's 28 million population, with Chinese and Indians making up 33 percent and 11 percent respectively.
The opposition is placed to make big enough advances that "Najib will more or less lose his mandate within UMNO," said Wan Saiful Wan Jan, the head of the IDEAS thinktank in Kuala Lumpur.
"The nationalist side within UMNO will become more vocal and that will destabilize Najib's reforms," he said.
Anwar pledges to make the judiciary independent, lift restrictions on the media and hold more open tenders for government contracts, which he says are too often handed out to UMNO "cronies."
The government says the inexperienced opposition cannot be trusted with power and is making promises it can't keep, such as writing off student loans and reducing fuel prices.
"This is a recipe for economic disaster. One need not be an economist to figure out that this will destroy the economy," Najib was quoted as saying by state news agency Bernama last week.
BATTLE FOR "FRONTLINE" STATES
The charismatic Anwar's acquittal allows him to write another chapter in his remarkable political comeback. The former student radical climbed the ranks of UMNO to be deputy prime minister before being fired in 1998 by then prime minister Mahathir Mohamad and charged with corruption and sodomy.
He spent six years in jail before a court overturned the charges, which Anwar said were politically motivated, only to face fresh allegations in 2008 that he sodomized a former male aide. State prosecutors quickly appealed his latest acquittal, meaning the issue will likely loom throughout the campaign.
The 64-year-old Anwar's freedom to campaign adds an X factor to an election that was already tough to call given a scarcity of reliable opinion polls. Pollsters failed to predict the extent of opposition gains four years ago, a result that prompted a 10 percent one-day plunge in Kuala Lumpur's main stock index as risk-averse investors took fright.
Anwar invokes the spirit of the Arab Spring in Malaysia, whose government is struggling to retain support among younger, urban voters and has some of the region's strictest security laws. Najib last year repealed two of the most notorious laws, but a new bill that bans street protests has been criticized by human rights activists as repressive and cast doubt on his reformist credentials.
"I say an Arab Spring in terms of the spirit and enthusiasm of the masses to rise against a corrupt establishment, but we still have an avenue through elections," Anwar told Reuters.
To improve on its 2008 performance, the opposition needs to make headway in three key states - Sabah and Sarawak on the eastern island of Borneo, and Johor, which borders Singapore.
The ruling coalition effectively won the election in those states in 2008, restricting the opposition to just three parliamentary seats out of 83. Anwar said that he was confident of winning 8-10 seats in Sarawak, where the opposition made strong gains in a state election in April.
Ong Kian Ming, a political scientist at Kuala Lumpur's UCSI university, said voting trends suggested the opposition could win between 10 and 20 seats in those three "frontline" states - not enough to form a government, but maybe enough to prompt unrest within UMNO that would force Najib out.
Still, the opposition faces an uphill struggle in rural areas, where voters are more conservative and more likely to get their news from pro-government media than from websites like Malaysiakini.com that are the main outlet for critical reporting on the government.
"I think the country as a whole is just not ready yet for that change to happen," said Wan Saiful.
(Reporting By Stuart Grudgings, Editing by Jonathan Thatcher)