“As long as the political instability continues, you are going to see arrests and prosecutions” for political concerns, Oh said.
In February, the government once again jailed opposition leader Anwar Ibrahim, hitting him with a five-year sentence for a sodomy conviction; Anwar has claimed this charge and a previous one for which he was convicted and jailed in 1998 were fabricated and politically motivated. His daughter, Nurul Izzah Anwar, was arrested for sedition last month.
Read More This country may be another oil victim
The political concerns come as Malaysia’s economy is already faltering after oil prices plunged over the past year. Oil-related income accounts for over 30 percent of government revenue and the price decline forced changes to the country’s 2015 budget, including a wider deficit projection.
But so far, the internal strife may not have hurt the economy much.
“There is currently no sign that the use of the Sedition Act has begun to have economic consequences,” Anton Alifandi, a country risk analyst at IHS, said via email. He noted that demand for Malaysia’s sovereign Sukuk sale last week was strong, with the government raising $1.5 billion, with around $9 billion worth of demand, suggesting strong confidence among investors.
Keeping that confidence remains important for the country, as non-residents hold around 28 percent of outstanding government debt, according to data from the central bank.
Private investment has also been a major contributor to economic growth, with an average growth rate of 14 percent over 2011-2014, but the country needs to compete with neighbouring Southeast Asian countries for already slowing foreign direct investment (FDI) inflows from multi-national companies, Affin Huang Investment Bank said in a note Wednesday.
–Nyshka Chandran contributed to this article.
—By CNBC.Com’s Leslie Shaffer; Follow her on Twitter @LeslieShaffer1