Contrary to the approach taken by many during the recent crisis, Malaysia had further liberalised the foreign exchange administration (FEA) rules in our efforts to promote efficiency, reduce costs and create a more conducive environment for trade, business and investment activities. The accomplishments in financial sector reforms and the many policy changes made have augured well for the country, as evident by our ascent into the top-20 bracket in the World Economic Forum’s financial development index this year. As with other countries within the region, we have also been a recipient of capital flows. As a result of continuous effort to strengthen the financial sector, our ability to manage the volatility and other impacts of capital flows has been enhanced. The financial markets and banking sector have proven their ability to absorb and intermediate these inflows while the Central Bank is always monitoring the market on a daily basis and is also well positioned to manage the situation. The domestic economy stands resilient and inflation remains under control. Furthermore, the pace of ringgit appreciation also reflected the positive underlying fundamentals of the economy. Trends of investing by central banks and institutional investors i)  The concept of diversification  Let me now share some thoughts on portfolio diversification. Nearly 60 years since the proposition of Modern Portfolio Theory by Harry Markowitz, many investors are still grappling with the challenges of portfolio diversification. Among the sands in the wheel of a welldiversified portfolio are transaction costs and information asymmetry.

What Exter repeatedly maintained was that the Central Bank was only a necessary condition for future prosperity. That necessary condition was to be created by maintaining price stability so that the economic agents could make economic decisions based on long run prospects. Since the central bank does not produce goods and services, it cannot directly get involved in economic activities. It is therefore the task of the government and the private sector to take appropriate measures to create wealth in the society. The Central Bank’s only weapon is to print money and such money, by changing the price levels, acts only as an illusion. Hence, Exter thought it necessary to warn those who had been harboring the Keynesian type of ideology to raise governmental expenditure through printed money. In the Exter Report, he argued that higher income created through money creation would simply stimulate consumption of imported goods and precipitate serious balance of payments difficulties. Given the underlying domestic production capacity, deficit financing may be an efficacious policy in developed countries that are largely dependent on foreign trade. But, it would not be the case with a developing economy. Hence, the Exter Report highlighted that, “this should serve as a warning to those who might hope that some of the policies growing out of Keynesian economics can be uncritically adapted to Ceylon”. As a safeguard, a provision was included in the Monetary Law prohibiting the Central Bank to engage in trade or otherwise have a direct interest in any commercial, industrial or other undertaking.