The regional banking systems as a whole have increased their strength and ability to manage risks. This renewed resilience is being underpinned by more market-driven initiatives, improved standards of corporate governance as well as the development of the necessary infrastructure to promote the financial markets. In this respect, regional financial ties underpin the reforms in the intermediation of capital and for rechannelling for productive investment within the region. The implementation of the Asian Bond Funds (ABF1 and ABF2) marks an important milestone in the path towards regional financial integration as part of the foreign reserves are invested in Asian sovereign bonds. Meanwhile, the introduction of ABF2 Funds as a new asset class in Asia, together with improvements to the financial infrastructure, tax and regulatory reforms, would contribute towards the broadening and deepening of regional bond markets over time. Building region-wide financial markets is relevant given that each regional market is typically small in size. Thus, inter-linked regional markets would raise the attractiveness of Asian investments to both global and regional investors. Following these external developments, Malaysia's growth prospects are expected to strengthen in 2006. The favourable external demand would reinforce the sustained expansion in domestic demand, which is expected to be positive for both real income and employment generation. Real private consumption is therefore set to grow further, while real private investment is forecast to expand, supported by the need to undertake capacity expansion, particularly in the manufacturing and oil and gas sectors, in addition to the services sector.

Tarisa Watanagase: Dealing with volatile capital flows Welcome address by Dr Tarisa Watanagase, Governor of the Bank of Thailand, at the 42nd SEACEN Governors’ Conference, Bangkok, 28 July 2007. *  *  *  Your Excellency Minister of Finance, Mr. Rodrigo de Rato, Mr. Hervé Hannoun, Fellow Governors, Distinguished Guests, Ladies and Gentlemen, I would like to begin by extending a very warm welcome to all of you to Bangkok. We are pleased to host the 42nd SEACEN Governors’ Conference and the 26th Meeting of SEACEN Board of Governors here in Bangkok. I would also like to express my sincere appreciation to His Excellency Chalongphob Sussangkarn, Finance Minister of Thailand, for his presence here to officially open the Conference. This year’s theme on “Living with Volatilities: Is SEACEN prepared for Rising Fluctuations in Exchange Rate and Capital Flows?” comes at an opportune moment, given a recent volatile and uncertain market conditions. This volatility has posed challenges to central banks in maintaining monetary and financial stability. Let me share with you some of my views on this very important issue. It is traditionally believed that emerging markets are subject to more volatile capital flows than developed countries due to underdevelopment of our financial markets and weak institutions. Thus, putting in place a more flexible exchange rate policy, credible monetary policy and sound domestic financial system could help emerging markets reduce the volatility of capital flows as well as its negative effect on the economic stability.