While inflation is expected to edge up slightly, it is forecast to remain below the 2% level. On the domestic front, resilient domestic demand and the recovery in external demand is expected to result in a more broad-based and diversified growth. All sectors of the economy are forecast to show positive growth in 2002. More encouraging is that private investment is expected to recover in 2002 to register a positive growth of 1.2%. Specifically, capital investment in the manufacturing sector is expected to increase following a more strengthened global recovery in the second half of 2002. Foreign direct investment (FDI) is expected to show stronger growth in the year. In 2002, the current account surplus is forecast to remain large at 7.9% of GNP. The financial account is expected to be supported by sustained inflows of long-term capital, including higher inflows of FDI. In view of the improved global economic conditions, FDI inflows are expected to be higher due to the projected inflows of equity from strategic alliances as well as inflows for expansion and new investment, in the manufacturing, services and oil and gas sectors. In recent years, FDI has become more broad-based with higher investment in the services sector. In addition, foreign investments are not only through equity, but also at the management level, especially in sectors such as information and communication technology, telecommunications, ports and financial services sectors.
For an open trade-dependent economy, stability in the exchange rates accords significant advantage in enhancing trade and investment opportunities. By eliminating wide swings in the exchange rates, the pegged exchange rate regime has provided a stable environment for businesses to plan their investments and to undertake their operations. At the same time, stability of the exchange rate also provides an environment that facilitates continuous structural reform to improve Malaysia's competitive position. It is through long-term structural adjustments rather than frequent adjustments in the exchange rate that a country can build a strong business foundation, improve efficiency and create the enabling environment that encourage competition and innovation. As a small open economy, Malaysia does not have influence over the external factors that affect the economy. However, by working on strengthening domestic economic fundamentals, Malaysia will be in a stronger position to manage and mitigate the impact of the volatility in the external sector. Three elements are important in ensuring that an exchange rate regime continues to operate effectively. First, it needs to be well supported by the domestic fundamentals. Second, there must be flexibility in domestic markets to enable the economy to adjust and absorb the impact from external volatility. Third, increased competitiveness is achieved through efficiency and productivity gains rather than relying on currency depreciation.