KUALA LUMPUR - Malaysia may issue up to RM18 billion (US$4.7 billion) in bonds this year and economic pundits today described the move as timely and crucial to bolster the economy amid fears sparked by the looming Iraq war.

Economists agreed that the government had an important role to spur the fragile economy amid a shortfall in foreign direct investment and the failure of the domestic private sector to fuel growth.

But they warned that funds from the bond issue must be utlilised prudently and in income generating activities to ensure socio-economic stability and sustainability.

Ramon Navaratnam, a former treasury deputy secretary-general, told AFP that the bond issue was crucial to counter an anticipated slowdown in the world economy since the funds could be used to help fund pump-priming measures due to be announced later this month.

"We have no other alternative. But we must be cautious in our spending because if we are not prudent our debts will increase," he said.

Economic package

Bond traders expect the government to issue between RM15 billion and RM18 billion of Malaysian Government Securities (MGS) in 2003, Rating Agency Malaysia Bhd. said in its February newsletter.

The traders predicted fresh sovereign bond issues after the government said it was planning an economic package to sustain economic growth, as world demand slowed and worries grew over a possible US-led military attack against Iraq.

Last year, Malaysia issued about RM15 billion in MGS, of which RM9 billion was tendered out while the balance was placed privately.

Speculation over the impending issues pushed the five-year benchmark MGS yield two basis points up to 3.09 percent in late trade Thursday.

Prime Minister Dr Mahathir Mohamad recently said Malaysia's economy is expected to expand by at least four percent this year, but a war in Iraq will derail growth.

Gross domestic product (GDP) grew by 4.2 percent last year, within the official forecast of between four and five percent.

Confident of growth

The government projected GDP to grow between six to 6.5 percent this year but Mahathir, who is also finance minister, said growth in 2003 would be lower at four percent.

"We hope to achieve four percent, maybe more, but this is dependent o­n the world situation."

"If war breaks out, it will affect our country and we may not be able to achieve our target. But if there is no war and with the programs we have launched, I am confident we will achieve a growth of four percent."

Navaratnam, who is now the corporate adviser to construction giant Sunway Group, said the government in its effort to be the new engine of growth must improve national competitiveness, promote new sources of growth and remove outdated constraints that impede foreign investments.

Another economist with an international brokerage house said the economy would be able to absorb the bond issues since Malaysia's foreign debt ratio was low.

"Our foreign debt is low and stable. Therefore it is acceptable to gear up," he told AFP on condition of anonymity.

External debt

Malaysia external debt had been steady since 1997 when it posted US$45 billion. In 1998 it was 43 billion dollars.

The economist said Malaysia, being a trading nation, would be hit if a war breaks out. "Hence, we need to boost domestic consumption."

Malaysia's trade surplus jumped 38.9 percent in January to RM6.3 billion (US$1.7 million), the largest monthly surplus since March 2000.

The United States remained Malaysia's largest single trading partner in January, surpassed o­nly by the Association of Southeast Asian Nation's, which accounted for 26.9 percent of total exports. - AFP