Hence, the adverse developments in the current account can be the outcome of capital inflows. Before I move on, let me sum up the risks of global financial integration as I see them, for this is really where the challenge lies. As a policy maker in an EM economy, living in a globalised financial system characterised by a huge pool of surplus liquidity is like living next to the sea. On a day-to-day basis, the tide comes in, the tide goes out. You learn to live with it. Sometimes, the waves are high and you need to take appropriate precautions. The sea is bountiful and to some borrowers it may appear to offer the opportunity of a cool escape from the searing heat of higher domestic interest rates. Like the call of sirens to ancient mariners, it lures residents and regulators with its enchanting promise of easy liquidity and growing domestic equity and bond markets. However, this vast sea also holds many dangers. It is affected by fierce forces that can create violent and destructive waves. Even when it is calm, beneath that calm surface there are dangerous currents. To the unwary, who wade in too far, it can drag them to financial ruin, be they businesses, individuals, or governments. Beneath its surface are hidden rocks that can drive even successful economies to the bottom of the sea.
Note for example, the obsession of the financial markets with when the Fed is going to increase its interest rate by a quarter percentage point! Frankly, I do not think any one of the QE central banks is thinking of putting down its fiddle just yet. But the anticipation is certainly creating instability and over-reaction in the global financial markets, with EM currencies experiencing a high level of volatility. It is also not inconceivable that having run out of profitable opportunities in other parts of the markets, portfolio funds are now making currencies the next game in town. Implications for Malaysian economy and financial system These global developments obviously have implications for Malaysia. First, the volatility in the global financial markets will continue to wash on to our shores and create a challenging environment for both policymakers and participants in our financial markets. Such volatility does have an economic cost. Second, the fact that for the first time all the major economies are showing positive growth will provide support to growth of the Malaysian economy. However, until global growth can become self-reinforcing, the weak nature of external demand will remain a challenge. The significant contribution of domestic demand to growth in the face of the adverse external environment over the past several years is a tribute to the resilience of our economy and financial system. It is an outcome of not only the policies that were implemented during these years but also in the years before.