This improvement has been underpinned by a recovery in domestic demand, particularly in consumption, supported by better employment conditions, the accelerated implementation of fiscal measures, the accommodative monetary environment and the continued access to financing. In 2010, the Malaysian economy is expected to sustain the growth momentum, driven by domestic economic activity and reinforced by improvements of growth of our major trading partners. The role of the domestic sector in driving growth is not new. Domestic demand has in fact been the main source of growth for the overall economy since 2003, complementing our large external sector. This trend highlights the fact that our economy is evolving towards a balanced growth model, deriving advantages from our economic linkages with the global economy while at the same time strengthening the domestic sources of growth. While growth in domestic consumption has been encouraging, the next step towards further rebalancing the sources of growth will be to increase the contribution from investment. A higher level of private investment would further improve our productive capacity and increase the potential for higher growth. In this, many new areas of growth would benefit from higher investment, including in the services sector, as well as in the development of enabling infrastructure for modern economies such as in broadband and green technology. Rising above the economic challenges While economic prospects have improved, the road to economic recovery will not be without challenges.

The approach will also continue to be risk-based, in which the expectations in governance and risk management are higher for the larger and more complex financial institutions, and when these expectations are not met, the Bank will respond with supervisory actions. The Bank will continue to act pre-emptively to deal with the risks, at the institutional and system levels. Judgements will be applied based on a broad range of information available on the potential build-up of risks. The regulatory framework adopted will continue to be consistent and aligned to international standards to safeguard the stability of the financial system. In this regard, Bank Negara Malaysia will implement the changes by the Basel Committee to improve the risk capture of Basel II for trading book, securitisation and counterparty credit risk exposures. We will also positively consider developments by the International Association of Insurance Supervisors to achieve internationally consistent capital standards for insurance companies. We will be introducing changes to improve the liquidity framework and strengthen the quality of capital, focusing in particular on equity as the predominant form of capital. We also support the global initiatives that are aimed at reducing the complexity of products, strengthening transparency and improving incentive structures. An area of current international deliberation which will have a significant implication on the domestic regulatory and supervisory environment is the increased emphasis on the macroprudential dimension of regulation and supervision. A key lesson drawn from the crisis has been the inadequacy of supervision that was primarily focused on individual institutions.