The stock market and exchange rate crashed. Unlike other countries, Malaysia did not have excessive external borrowing. However, domestic borrowing was very high as banks had lent large sums, often against share collateral and to large property projects. The crash exposed these weaknesses in the private sector. On 1 September 1998, Malaysia decided to impose capital controls. Indonesia Indonesia was also believed to be fundamentally sound, even well after the initial outbreak of the regional currency turmoil. In late 1997, analysts continued to be upbeat on Indonesia’s economic prospects, expecting, on average, a strong 6-7% GDP growth in 1998. But as regional problems stacked up, Indonesia too could not escape the progressive erosion of confidence. The Indonesian economy had two domestic weaknesses: unsound banks and companies that had borrowed excessively abroad in short-term loans unbeknown to the government. These companies started hedging their exposures, sending the rupiah into a downward spiral. The companies became insolvent, badly affecting the banking system. Policy errors by the Suharto government compounded this. Grave social and political difficulties eventually led to a political crisis and a political transition that is still not completed. Korea Korea’s dynamic economy had certain weaknesses, but these were long-standing and well known: chaebols were very highly leveraged and banks often made lending decisions on government direction instead of commercial viability. Like Indonesia, Korea’s short-term foreign debt was high. When the crisis broke, foreign creditors refused to roll-over credit lines. Korean banks which had borrowed heavily overseas came under severe pressure.

During the last six months, my colleagues from the Governing Board and I have held frequent meetings with representatives of the business community; these discussions were very heated. It is therefore clear to me that adjustments to a strong currency do not happen just like that. On the contrary. Adjustment processes as a result of appreciation shocks are always very painful. Underlying these processes is a great willingness to take risks on the part of companies and investors, and a high level of commitment and flexibility from employees. In addition, our eight delegates for regional economic relations are constantly in touch with companies from different industries throughout Switzerland. The results of the special survey on the effects of Swiss franc appreciation conducted in the last two quarters show that a large portion (70%) of the companies surveyed are being negatively affected by Swiss franc appreciation. Many companies’ margins have come under pressure. However, the surveys also illustrate how quickly – and differently – companies have reacted to the challenges. The fact that our most current survey suggests a slightly improved economic outlook is encouraging. Economic developments abroad are even more crucial for Swiss exports than the exchange rate. The importance of global economic trends for our country can be clearly seen in chart 2. It shows that downturns in world trade and dips in growth in Switzerland occur almost concurrently. But the characteristics of demand from abroad differ in important ways.