(AFP) Malaysia is to launch a US1 billion dollar (RM3.8 billion) bond issue in the international market to raise funds for government projects, Prime Minister Dr Mahathir Mohamad said today.

"It's not specific for any projects. It's just to top up some of our requirements. It's a normal practice. Every year we go to the market to raise some funds through bond issues," Mahathir told reporters.

He said proceeds would not be used to shore up declining foreign exchange reserves, which could still finance up to three months of retained imports.

Asked if Malaysia's forex reserves were adequate to defend the ringgit peg, Mahathir said: "There's nothing to defend. Why should we defend the ringgit? Nobody can attack the ringgit."

The ringgit has been pegged at 3.80 to the dollar since capital controls were imposed in September 1998, amid a regional recession.

The economy has since rebounded but Mahathir has said the peg would remain until international rules were in place to curb currency trading.

Analysts said that whether or not the aim of the issue is to shore up foreign reserves, it would reduce pressure for any re-pegging of the ringgit.

To plug the leak

Nizam Idris, regional economist with Singapore-based IDEAglobal, said the 10-year US bond issuance would help develop the Malaysian sovereign bond market and pump new capital in the economy.

"The proceeds from the issuance would come in handy to help plug the leak in international reserves, a major variable that we think will decide the tenability of the ringgit peg," he told AFP .

Nizam said the bond issue would help bolster the slowing economy to achieve the official growth forecast of five percent to six percent this year.

The government in March revised its forecast from seven percent previously.

"Failure to meet the already revised downward target would reflect badly on Mahathir who is acting finance minister following the resignation of Daim Zainuddin at the end of May," he added.

Funding purposes

Earlier, the finance ministry issued a brief statement saying the bond offer "represents new financing and will be used for the general funding purposes of the government".

It said the bonds would be rated 'BBB' by Standard and Poor's and 'Baa2' by Moody's. JP Morgan and Salomon Smith Barney have been appointed joint lead managers.

In March Mahathir unveiled a three-billion-ringgit supplementary budget to shore up the economy amid the US slowdown. He said the government has to take "preemptive measures" to sustain the growth momentum.

Mahathir said the government's 2001 budget deficit of 4.9 percent of gross national product might rise slightly following the additional spending. He gave no details.

Among new projects identified were 200 schools, 193 colleges, four universities, 6,600 houses for soldiers and 600 million ringgit in oil palm replanting subsidies and special assistance to rubber smallholders.