Financial liberalisation and advancements in information and communications technologies have connected the different national financial systems to create a global financial network through which financial resources flow around the world. In such a system, when there are disturbances in the small financial systems, it would merely be a ripple in the global financial system. But, if something happens in a large financial system, its impact would send shockwaves across the entire network. If policymakers, especially in the large economies, do not understand this, or underestimate its implications, it could lead to an overestimation of the effectiveness of national macroeconomic policies and underestimation of the global impact of those policies. The global financial system is in a state of constant evolution with key impetus coming from technological advancements, financial innovation, regulatory changes, financial incentives and regulatory arbitrage. The globalised financial system and what it means to be a part of it So, let me first turn to the implications for Malaysia of being a part of the globalised financial system for there is no doubt that Malaysia has become more financially integrated globally. Malaysia’s financial integration with the world Based on data on Malaysia’s International Investment Position, which is compiled by Malaysia’s Department of Statistics, outstanding non-resident investments in Malaysia increased by almost 4½ times between 2001 and 2014 to reach $ billion. That is the amount that non-residents have invested in Malaysia as of 2014 in the form of FDI, portfolio investments and other investments such as deposits, loans and trade credits by banks and corporates.

Second, regional policymakers are still trying to trying to make the cultural change whereby we are comfortable with both hearing about potential vulnerabilities in our economies and being comfortable in expressing concerns about vulnerabilities that may exist in our regional neighbours. That is a cultural change but it is a necessary change if regional surveillance and defence mechanisms are to be truly effective. Of course, it is must be remembered that, regional or international, such mechanisms are a supplement and not a replacement for national resilience. What the future holds? The state of the global economic and financial system It is indeed the case that after almost seven years of ups and downs, there continues to be plenty of uncertainty. Therefore, let me just say that we have been going through very stormy weather for the last seven years, and now we see some of the dark clouds parting and the sun shining through. Does it mean the storm is over? I cannot say. It is still the case that reading a financial newspaper on Friday can sometimes give a different picture of the global economy from what was reported on Monday. Many macroeconomic statistics continue to be volatile or show weak trends. On the other hand, many financial statistics, while also being volatile, have shown very strong trends. BIS central bankers’ speeches  7  After seven years of very aggressive monetary policy, we continue to face a world of weak growth. There has been much discussion of the new normal.