My remarks today will focus on three areas – firstly, the outlook for the Malaysian economy as developments continue to unfold in the domestic and international economic environment. Secondly, I will discuss some of the key lessons that may be drawn from the recent credit turmoil and their implications for the Malaysian banking system. And finally, I will take the opportunity to share with you some thoughts on our vision for the financial sector beyond our current financial sector masterplan and the thrust of our strategies going forward. The Malaysian economy enters this more challenging period following several consecutive years of solid growth that averaged 6%. The economy grew by 6.3% in 2007, the fastest pace in three years with the growth momentum being sustained in the first half of 2008. In the first quarter of this year, the economy expanded by 7.1%. This stronger growth was achieved despite the more difficult environment with slower global growth and increased uncertainties in the international financial markets. The successful transformation of the Malaysian economy in this recent decade has been one of the important contributing factors. It has led to more diversified sources of growth resulting in a more balanced economy. While the external sector remains important, domestic demand now has a more significant role in driving the growth process. In addition, the services sector has become a more important source of growth. Moreover, the agriculture sector continues to expand as Malaysia benefits from the high commodities prices.
The region however, still remains highly integrated to the global economy and international financial system and therefore will have to manage the risk of moderation in global growth in the event that a more pronounced slowdown occurs in the major developed economies. This risk is compounded by the high and rising energy and commodity prices, which are impacting inflation in most countries today. Stronger demand for grains, the diversion of land used for food crops to biofuel crops, the higher transportation costs and adverse weather conditions are some of the factors driving the rise in food prices. As a consequence, rising cost pressures on inflation in the global economy can be expected to persist. Should global growth however, continue to moderate in the second-half of 2008, this can be expected to slow the pace of increase in energy and food prices, which in turn, will moderate the inflationary pressures that are currently being felt. Several domestic factors have sustained the growth of the Malaysian economy indicating that external demand has thus far resulted in only a modest moderation in our overall growth as the underlying strength of the economy has been able to sustain the resilience of the growth process. This has been underpinned by the strong domestic demand which has become a key driver of growth. The strong growth that has been achieved so far is on account of the robust expansion in private consumption and investment expenditure.