Another factor that contributed to the strong performance in the stock market is that the Thai market had a relatively low P/E ratio compared to other markets, regional and extra-regional, and the positive price correction might have been at large. But, whether the inflows that have been driving the market up will stay for long will depend on the underlying fundamentals.This is to say that in order to attract long-term investors that they need, Thai companies must persevere with business restructuring and continue to reform their operations. But more importantly at the macro level, the economic recovery process must continue firmly, and be supported by the right policy mix and by further progress on the unfinished reforms. I would like to turn your attention now to what we see as the risks in the process of recovery. The speed and robustness of the recovery will depend in large part on the turnaround of the global economy. On this front, the Bank of Thailand remains cautious in our optimism. Our guarded optimism is based on two reasons. First, the US economy, which absorbs roughly 20 per cent of our exports, is likely to rebound later in the year while Japan, where 15 per cent of our exports go, seems more likely to remain in the mire for the rest of the year. Therefore, the global economy as a whole may not be expanding much. Second, a US recovery, particularly if led by electronics, may not benefit Thailand as much as it will benefit other regional economies.

A logical part of that process was that in 2000 the Bank began to publish semi-annual financial stability analyses in its quarterly Monetary Bulletin. One reason for the increasing focus of the Bank on systemic financial stability issues in the late 1990’s was the growing perception in a liberalised financial market that a weak financial system could undermine economic and monetary stability just as much as economic imbalances and weak policies could undermine an otherwise sound financial system. A sound financial system, including safe and secure payment and settlements systems, is also an important precondition for the effective implementation of monetary policy. Capital movements were fully liberalised in the 1990’s, as was the domestic financial market which also underwent significant structural change, including the withdrawal of the government from direct ownership in banking institutions. These developments stiffened competition at home and linked the domestic financial system much more closely to international markets. Consequently, in its analyses, the Central Bank consistently draws attention to the potential vulnerability of the domestic financial system to changes in the external environment, including the ready availability of foreign credit for refinancing purposes, and its vulnerability to sudden changes in the exchange rate. The developments in the Icelandic economy towards the end of last decade and into this one resembled in many ways those experienced in some of the other Nordic countries a decade earlier. Needless to say, and in view of the experience of other Nordic countries, these developments caused considerable concern about the underlying stability of the financial system.