Malaysia has trading and investment relations with many nations. We therefore, cannot look at movements of any particular currency pair as a basis for determining the appropriate valuation of the ringgit. A longer-term perspective to exchange rate policy is taken, looking at the relationship between the exchange rate and economic fundamentals. Of greater importance is to focus on enhancing our overall productivity and competitiveness against all our major trading partners. The pegged exchange rate has served Malaysia well. It continues to serve Malaysia well. This is manifested in terms of the significant growth in the volume of trade and the steady inflow of foreign direct investment. In trade-weighted terms, the exchange rate is not misaligned. Since the ringgit peg to the US Dollar, the ringgit real effective exchange rate (REER), which is the trade weighted value of the ringgit against our major trading partners’ currencies after taking into account changes in our inflation relative to those of our trading partners, has fluctuated within a range of plus or minus 7%. This is well within an acceptable range. More importantly, the ringgit REER has not experienced a sustained trend towards increasing appreciation or depreciation. The ringgit has essentially gravitated around its fair value and has not experienced misalignment. Finally, the Malaysian economy has both external balance in the form of a sustainable current account and internal balance in the form of price stability. This again supports the ringgit being fairly valued.

Developing and diversifying the financial infrastructure is another important component of capacity building. In this respect, our Financial Sector Master Plan which was released in 2001 represents a ten-year strategy that charts the development of the financial sector. The focus of the initial phase of the plan is on the development of the financial infrastructure and financial markets as well as capacity enhancement and institutional development, in particular, of the domestic financial institutions, thereby putting in place the pre-conditions for moving forward to a more liberalised and competitive environment. Gradualism has been adopted to avoid disruptive and unstable conditions. The aim is to evolve a more diversified financial system with financial institutions that are efficient, innovative and resilient. The Masterplan places priority on good corporate governance and transparency within an effective regulatory and supervisory framework and a strong structure for consumer protection. BIS Review 8/2004  1  Liberalization of capital account The second factor in enhancing national resilience is the approach to liberalising the capital account. While liberalisation of the capital account has potential benefits, it also carries substantial risks. For emerging economies, where the financial infrastructure is still relatively less developed, the premature liberalization of capital flows could lead to an accumulation of risk factors that could lead to instability and culminate into a financial crisis. The approach for the liberalisation of the capital account in Malaysia has been to adopt appropriate sequencing so that the increase financial integration will not have destabilising implications.