On the positive side, Petronas has received US dollars that can be invested in foreign ventures. If the business plan is sound there may be some sagacity to note, but if not, the money will soon be gone, the nagging debt remaining. The planned "international ventures" are not delineated in any detail, and one hopes there is a profit at the end of these plans sufficient to retire the bond debt.

There are, however, some major negatives, none of which are to be found in the chorus of positives put forward by the underwriters. This is to be expected, as they are on the hook, so to speak, until all of their allotment is shifted to other hands. There is a niggling nervousness associated with a failure to disclose, but this is a matter to be resolved between the potential buyers and the underwriters.

Petronas, unfortunately, is not operated as an independent corporate entity. It is under the direct management and control of the Malaysian Prime Minister's department, and thus the new bond float is more properly regarded as a personal loan to the Prime Minister, Mahathir Mohamed. This raises a question as to the proper separation of the bond proceeds from the daily operating requirements of the Malaysian government, and the expenses associated with funding the ongoing activities of the Prime Minister's political party. The significant cost associated with endemic corruption is an additional factor for each individual to estimate.

Because the proceeds will be reduced by commission costs and other fees, the net sum to be realised is lower than the face figure. Also, because a portion of the proceeds are used to retire existing debt, useable funds are further reduced. The net proceeds available for "international ventures" may then be distributed to the appropriate designated projects. This raises a question of transparency, specifically whether there is commingling between Petronas funds and other government funds.

One notes with dismay that the Prime Minister is also the Finance Minister, and that there is a long-standing policy that everything touching on political accountability in Malaysia is an official secret, bolstered by a muzzled media. On a routine basis, Petronas funds have been freely used to rescue failed firms, and the Prime Minister shows no inclination to discontinue this practice. On the contrary, the trend is for increased activity, as the accounts previously entrusted to the ex-UMNO treasurer Daim, are being repatriated.

It is widely rumoured that Petronas funds are used to meet the government payroll each month, the government not having sufficient income from other sources to meet this obligation. Political stability in Malaysia is critical to Western interests, and another financial crisis similar to 1997 is not desirable. There was widespread concern at that time the fall of the Asian Tigers would bring down the entire global financial system, and now the threat re-occurs. Thus every effort is being made to keep Malaysia above water. The problems arising from Argentina and Enron are sufficient for the moment, so Malaysia's feet are being pulled from the fire.

A massive public relations effort has been conducted to give Malaysia the appearance of respectability, including Mahathir's welcome by US President Bush. Their meeting was apparently attended by considerable esophageal constriction. The underwriters have undertaken extensive roadshows of their own, in a massive effort to present the offering in a favourable light. There is a sad lack of candor, and negative aspects have not received publicity.

The Malaysian government payroll, apart from the Petronas payroll, contains over 800,000 employees, including the police, military, teachers, and other civil servants. The average salary is estimated at RM 1,000 per month, for a RM 800 million monthly obligation. The annual payroll is thus in the range of RM 10 billion. This corresponds exactly with the amount to be raised by the new Petronas bond. The net bond proceeds, large as they may seem, will not cover one year's government payroll. More bonds sales are anticipated.

There have been widespread reports that Malysia has gone on an arms spending spree, giving an impression that the government is flush with funds for this purpose. This is not only contrary to common sense, it deliberately paints a false picture. Though the planned armaments purchases make news, no concrete contracts have been announced, by Malaysia or the vendors. Perhaps palm oil is a poor medium of exchange in the arms market.

The Malaysian government operates on significant borrowed funds, and the debt has increased each year since 1997. Deficit financing is the Prime Minister's answer to any fiscal problem, and he hopes to partially control the growing monster using a currency peg to the US dollar. The Petronas bond is to be repaid in US dollars over an extended period, which means the currency peg must remain in place for that period. This effectively ends speculation about the future of the currency peg. Malaysia must now accept the consequences, which primarily is the erosion of its ability to compete with China, and secondarily is the risk of staying with the dollar should it take a fall.

If the ringgit is allowed to float, it would probably fall, just as other SE Asian currencies have fallen, and the government and any company required to repay debts in US dollars would face a large loss. In this sense, Malaysia has made a poor decision, in that it has opted to indefinitely defer restructuring, preferring to roll forward its rising debt in order to survive. The decision to maintain the currency peg removes the flexibility necessary to promote a healthy manufacturing sector to foreign investment.

Buyers should consider the Petronas bond as a variation and extension of existing Malaysian sovereign bonds. This is true because they are treated internally as being part of the same national income pool. But the income from the Petronas oil pool is becoming more undependable, because known Petronas reserves will be depleted long before the last maturity date of the bonds. Since the price of oil and gas is subject to cyclical variation, and new fields are future finds, there is an unknown factor in estimating dependable future income.

Petronas has contingent liabilities that are not fully disclosed, among which is the increasing cost of royalty payments withheld from the northern state of Terengganu. The fact that the Prime Minister broke a contract of twenty-five years standing, acting as a third party, should put potential bondholders on notice of other unrevealed risks.