The regional banking systems as a whole have increased their strength and ability to manage risks. This renewed resilience is being underpinned by more market-driven initiatives, improved standards of corporate governance as well as the development of the necessary infrastructure to promote the financial markets. In this respect, regional financial ties underpin the reforms in the intermediation of capital and for rechannelling for productive investment within the region. The implementation of the Asian Bond Funds (ABF1 and ABF2) marks an important milestone in the path towards regional financial integration as part of the foreign reserves are invested in Asian sovereign bonds. Meanwhile, the introduction of ABF2 Funds as a new asset class in Asia, together with improvements to the financial infrastructure, tax and regulatory reforms, would contribute towards the broadening and deepening of regional bond markets over time. Building region-wide financial markets is relevant given that each regional market is typically small in size. Thus, inter-linked regional markets would raise the attractiveness of Asian investments to both global and regional investors. Following these external developments, Malaysia's growth prospects are expected to strengthen in 2006. The favourable external demand would reinforce the sustained expansion in domestic demand, which is expected to be positive for both real income and employment generation. Real private consumption is therefore set to grow further, while real private investment is forecast to expand, supported by the need to undertake capacity expansion, particularly in the manufacturing and oil and gas sectors, in addition to the services sector.

Cumulatively, this rapidly expanding domestic demand has represented an important market for the region. It has also increased the pace of regional integration. While energy prices have remained high, this is not expected to undermine the global growth momentum. Oil price increases thus far have mainly been demand-driven, and therefore, well absorbed compared to historical episodes of oil shocks. However, the tight global supply conditions that prevail have not removed the risks of higher oil prices. The inflationary trends that have emerged, has prompted the monetary authorities in a number of countries to raise interest rates. While the degree has varied across countries, these moves have primarily reflected the need to anchor expectations and limit the second-round effects of rising oil prices. This has therefore continued to allow monetary conditions to remain supportive of growth. In view of the broadly favourable outlook for the global and regional economies, renewed attention has been focused on the prevailing imbalances in the global economy. This is a pertinent issue especially as these imbalances are expected to widen in 2006. It is recognised that reducing the global imbalances is a shared responsibility, across the major regions of the world. Several reasons have been cited as constraints to the process of adjustment. This include the relative lack of strength in domestic demand outside the US; the large gap between saving and investment in major regions of the world; and the fragmented structure of global capital intermediation that hinders surplus regions from financing productive investments within their region.