The appreciation of regional currencies is not likely to eliminate these imbalances. In fact, excessive focus on the exchange rates as corrective mechanisms for these imbalances has led to speculative capital inflows into Asian economies. This has required policy makers to intervene to avoid a sharp appreciation of their currencies, thus accumulating large reserve holdings. Clearly, at best, exchange rates offer only a partial solution and excessive focus on this area could in fact be counter productive. It risks sharp movements in exchange rates which at the extreme would be highly destabilising to the global currency, capital and commodity markets. The long-term solution would be for the US to increase its savings and moderate its import demand and for the rest of the world to increase its demand and imports. Such a transformation will eventually occur but it is unlikely to occur overnight. In the transition there could be some economic dislocation. However, with its young workforce and with the growing productivity, competitive and dynamic economies, there is great potential for the Asian economies to become the growth dynamo for the region and the world. With rising income levels in regional economies, particularly among the growing middle income group in China, India and the ASEAN economies, there is potential for an intrinsic source of demand within the region. This rebalancing of demand across the world will eventually reduce the prevailing imbalances. In 2004, the Malaysian economy experienced strong growth. Going forward, the economy will continue to be well supported by both domestic and external demand.

Any change in the exchange rate regime would be on the basis of longer-term structural considerations and not on account of short-term movements in capital flows and transient shifts in exchange rate expectations. Ladies and Gentlemen, In spearheading the development of the financial sector, Bank Negara Malaysia's objective is to develop a dynamic, competitive and resilient financial sector. In the year 2005, focus will be accorded to strengthen the effectiveness of the banking sector in meeting the new requirements of the economy, enhance competition and hence efficiency and to strengthen the infrastructure for consumer protection. These initiatives would be taken in the context of preserving the soundness and stability of the financial system. An important component of a strong financial sector is the institution of a robust regulatory and supervisory framework. Two main principles will be taken into consideration in the formulation and implementation of prudential policies. First, is the creation of a regulatory environment that fosters innovation and competition, while promoting best practices to preserve financial stability. Policies will therefore balance the need to attain efficiency whilst preserving stability. Second, regulations will increasingly be "principle-based". Regulations will focus on identifying parameters within which banking institutions must operate, whilst retaining sufficient flexibility to allow institutions to determine their own individual strategies and approaches within these parameters. This is in the light of the improved corporate governance and risk management practices within banking institutions. The Board and management will be accountable for strengthening individual institutions.