These events have brought to the forefront key issues regarding financial intermediation, financial innovation and the corresponding regulatory and surveillance mechanisms that need to be put in place to provide the necessary oversight over such activities. Although our domestic financial system was not impacted by the sub-prime crisis, its underlying causes bear important lessons for Malaysia, and indeed, for other emerging economies, as the forces of globalisation continue to drive the modernisation of our financial systems. Firstly, the combination of a misaligned incentive system, a favourable macroeconomic environment and heightened competition generated excessive risk-taking by financial institutions. Under these circumstances which prevailed prior to the current crisis, financial innovation occurred at a pace that outstripped the capacity of the financial system to manage the risks associated with such innovations. Indeed, one of the fundamental underlying weaknesses was the erosion of sound practices in the mortgage market segment, with banks compromising on sound underwriting standards and risk management practices in pursuit of short term gains and market share. While the banking institutions had increasingly employed sophisticated financial engineering techniques to repackage mortgages into complex structured securities, such financial innovation was not supported by commensurate enhancements to governance processes and the risk management infrastructure and practices. This resulted in a significant underestimation of the risks being borne by the financial institutions and to an overestimation of the capital buffers in the financial system. Secondly, the events of the financial and credit market crisis have re-focused attention and debate on the susceptibility of the financial system to market failures.

Malaysia's economic structure has also become increasingly more diversified with increased contribution to growth from the services, agriculture and commodities sectors and the resource-based and knowledge-driven industries. Malaysia is also very much part of the regional integration that is taking place. Today, about 63% of our exports are to the countries in the Asian region. Efforts are also being put into forging stronger trade linkages with other non-traditional markets in West Asia and the Middle East and these efforts are now showing positive results. The trade links are also reinforced by increased investment flows within and between these regions. The inflow of foreign direct investment into Malaysia has remained steady while Malaysia's investments abroad, in particular, to this region are increasing. Finally, an important factor supporting the resilience of the economy in this more challenging time is the sound macroeconomic fundamentals, the high international reserves and the capacity for policy stimulus to be undertaken to manage the risks to growth. The economy is also supported by the favourable financing conditions and strengthened banking system. Ample liquidity amidst a relatively low interest rate environment and declining non-performing loans have sustained private sector access to financing. The urgent issue that may be raised today is to what extent will the price adjustments announced yesterday have an impact on the economy. Related to this is the extent to which inflation will increase and whether this would in turn affect the country's competitiveness. Key to dealing with these risks is the flexibility of the Malaysian economy.