RD: Malaysia is currently enjoying strong GDP figures, with some analysts actually projecting the third quarter GDP growth of 7.5 percent and a seven percent growth for next year. Interest rates continue to remain low; with the base lending rate (BLR) remaining at 6.5 percent while inflation continues to remain a benign four percent - low by any standards. Meanwhile, government expenditure is expected to outpace income - in the region of RM20 billion - marking Malaysia's third consecutive year of deficit spending. Do you expect any of these figures to come in significantly different?

TSY: For this year, we are looking for an 8.5 percent GDP growth for 2000 and 6.3 percent for 2001. The issue to focus on is that inflationary pressures are very real - with the various hikes in petrol and transport prices. Inflationary pressures are definitely mounting and interest rates should see an upswing. There have been very subtle changes in the banking system. If you check around the banks at the moment, the mortgage war has definitely eased. You don't see the great bargains which were available at the start of the year anymore. So this is already a sign that we have reached the bottom in terms of where interest rates are heading. However, I don't think that they will pick up dramatically. It will be gradual.

VS: This year, we are looking at 7.5 percent, although eight percent is also achievable. Next year it [GDP growth] is going to come down, maybe to 6.5 percent. This is looking at what is happening in the world markets, especially in the U.S. I agree that interest rates seem to have bottomed out and I think it will be on the upswing in the coming year. Inflation will then obviously become a concern. As such, inflation is one area we will have to keep an eye on.

GKK: We are expecting quite strong growth for this year, in the region of 8.9 percent followed by a relatively strong seven percent next year. The growth will come mainly from domestic and external sources. From domestic sources, it will again be spearheaded by the manufacturing sector, which is expected to be the main driver of growth. As for inflation, I would agree with the view that inflation may be creeping up. The government, through various measures, such as introducing more items on the price control list as announced recently, could possibly put a cap on the consumer price index (CPI).

RD: What I would really try to get an answer on is whether we will be looking at a budget deficit or a budget surplus.

CYK: We have registered a very strong growth this year. I don't see anything wrong with running a budget deficit because we need an expansionary policy. The question is not really whether we should be in deficit, but whether an expansionary policy will lead to further inflation. The challenge the government is facing right now is that the growth is not widespread. So at the end of the day whether there is a deficit or not depends how they are going to tackle the various sectors of the economy. However, I would expect a slight deficit.

SP: With the economy still not seen as "settling down" after more than two years of regional financial crisis and with an uncertain global economic outlook, which would be a better end result this time around? A budget surplus or a budget deficit?

GKK: A budget deficit would be a better choice.

RD: A warning sign for the economy on the whole is that loans growth has been weak - at just plus two percent in July. Money supply growth has also been a slow plus 3.7 percent. With the current expansionary monetary policy to continue and notwithstanding the relatively low interest rate regime that we are already in, do you think an expansionary fiscal policy is still required? If so, what fiscal measures do you think the government can undertake to boost this weak loans growth? And more importantly, why has loans growth been measly?

CYK: When we talk about loans growth, we must understand that it is a question of supply and demand. When the economy is on the upswing and things are going very well, and you have that level of confidence, bankers do not mind lending. But when you are on the downswing, suddenly you have a huge lack of confidence. At the end of the day, when this happens, we have a situation where the bankers only tend to lend money to those who have collaterals, secured and really do not need to borrow.

RD: Are you saying that they are only prepared to lend to those who do not need it?

CYK: Precisely! Those who really need the funds do not have access to it and this is where the government needs to do something. However, it is not an easy task. Fundamentally, what is important is how the government is going to revive the level of confidence.

RD: The government is well aware of the problems of getting the private sector to do something for the national good. As I said earlier, I think a lot of our bankers are still caught in a time warp. They are totally locked in the whole idea of securitized lending and there seems to be a tremendous lack of acumen in terms of being able to look at a business plan and decide it can make money. What's likely to make the bankers change their mind set here?

GKK: I think there is very little left for the government to do. If we were to look at what they [the government] did last year, they set a target of eight percent [for bankers' loan portfolio] and raised it to 10 percent. Last year's budget had an incentive for banks, whereby if they achieved a loan growth exceeding eight percent, interest income on anything that is above that level is exempted from tax. But all of these were never totally implemented. With the exception of a few banks (Hong Leong Bank Bhd and Public Bank Bhd), which managed to achieve this target, most were unable to do so. So even with this directive from the various government agencies, we do not see banks aggressively lending out there. In terms of micro measures, there are actually very little left to do. What the government could do is to have a very accommodative monetary policy and basically let the interest rates stay low. You may see inter-bank rates going up, but not the BLR. And this is a bad squeeze on the banks' margins. Right now, if you were to look closely at how the BLR is calculated, it is pegged to the intervention rate. Currently, there is still a very large disparity between the intervention rate of 5.5 percent and the three-month KLIBOR at 3.3 percent. Based on the intervention rate, the BLR is still 6.8 percent. So even if interest rates on the whole rise and we do expect the KLIBOR to rise to as high as five percent by the end of next year, it may still not translate into a change in the intervention rate set by Bank Negara. Which means that the BLR could stay low. So even if it did increase, it would not increase as substantial as the increase in the three-month KLIBOR.