Although the world economy has so far been able to absorb the impact of higher oil and commodity prices, they are a primary factor of risk, and economic policies should remain duly vigilant. Along with dearer energy, increasing global external imbalances (which, far from being corrected, continued to widen in 2005) are another characteristic feature of the international economic situation. The US external deficit reached a new high, the counterpart of which was the bigger surplus of the emerging Asian economies and, most notably, of the oil exporting countries. This build-up of imbalances reflects the insufficiency of the economic policies geared to their correction in the main economies involved, a point to which I shall return later. How can we explain the resilience of the world economy in the face of the adverse impact of dearer oil? We must acknowledge that our understanding of some of the features of this upturn is as yet limited, owing among other reasons to the far-reaching structural changes taking place in the world economy, which hamper the diagnosis and interpretation of certain features of the recent expansion. As the main determinants of this resilience, however, we can identify the confluence of expansionary macroeconomic policies, generous financial conditions and strong rises in real-estate and financial assets, against a background of price stability. I shall now address these factors to examine their distinctive features. As stated, macroeconomic policies remained expansionary in 2005. This needs qualifying, however.

Malaysia already has in place high quality physical infrastructure but considerably more is needed. Steps already being taken include the development of an efficient urban public transportation system, reliable and seamless broadband connectivity and energy efficiency-related infrastructure. This also needs to be reinforced by the  2  BIS Review 146/2010  transformation of the Government machinery to support the transition to a high value added economy. The final and fifth factor is the ability to effectively participate in the economic and financial integration with other emerging economies in particular with that of the region. Asia, in particular, offers immense opportunities for increased participation by Malaysia. Indeed, there is already rising investment into the region by Malaysian companies and this trend can be expected to continue over the medium term. This is particularly pronounced in the financial sector, where Malaysia’s domestic financial institutions are now increasingly having a greater presence in the region. Of importance, is that such ventures yield mutual benefit. There must also be value added to the countries concerned so as to ensure the sustainability of such ventures. II. Financial stability and potential risks in the financial system  Let me now turn to the financial system and financial stability. The Malaysian financial system has continued to perform well throughout 2010, with a high degree of resilience and stability even under the more challenging conditions. The capital positions of both the banking and the insurance sectors have remained stable, well above the regulatory requirements.