, where individual countries were affected almost immediately after the thai baht collapsed in mid - 1997, partly because of perceptions and the herd - like reactions of international investors. in the case of this group of countries, contagion worked mainly through the withdrawal of short - term foreign financing to banking institutions, trade financing, and all forms of foreign loan facilities. • second, there was a further group of countries that were affected only gradually through a decline in the flows of portfolio investments from industrial to developing countries. emerging market economies with fledgling capital markets were mainly affected with some time lags by the change in the attitude of the managers of major institutional investment funds who at some stage decided to convert high - yielding, high - risk assets into low - yielding, high - quality assets. south africa is a good example of such a country that suffered in the wake of the east asian crisis, mainly as a result of a large - scale withdrawal by nonresidents of portfolio investments previously made in the country. • third, another group of countries representing mainly exporters of primary products, metals and minerals were affected with an even longer time lag by depressed world economic conditions created by the east asian cum global financial market crisis of 1997 / 98. not all countries have therefore been affected in the same way by the global financial crisis of the past two years, and not all countries can therefore rely on the same protective measures to prevent the same disastrous effects in future. there are, nevertheless, many commonalties in the challenge for monetary policy, despite the differences in conduits followed in the transmission of contagion to the various countries. whether a balance of payments deterioration takes place through an outflow of short - term finance and the withdrawal of loan funds, or through the repatriation of previously invested portfolio funds, or through a decline in exports, the proximate monetary effects are more or less the same : • first, the overall supply and demand conditions in the market for foreign exchange will change and a short supply in foreign currency may develop. some pressure for depreciation will therefore be exerted on the exchange rate. • second, liquidity conditions in the domestic money and capital markets will tighten, and upward pressure will be exerted on interest rates and yields on financial assets. • third, banking institutions will lose liquidity and their capacity to provide loans to their domestic clients will be reduced. • fourth, inflationary pressures will emerge within the economy, particularly in a relatively open economy where import

third quarters of 1998. the negative flow of portfolio investments turned positive again towards the end of last year ; liquidity conditions in the banking sector eased ; interest rates declined and are almost back to levels that applied at the beginning of last year ; inflation peaked at 9. 3 % and is now gradually declining again ; and the country ’ s foreign exchange reserves are on a rising path. in the heat of the situation, monetary policy, which in the case of south africa had to carry a heavy burden in the adjustment process, was criticised a lot and was even blamed by armchair economists for causing the problems. with hindsight, the policy of letting the markets work with only smoothing - out intervention operations may not have worked as badly as the critics of the policy predicted. exchange rate policy one of the elements of the restabilisation programme used by the south african monetary authorities over the past 30 years again elicited a lot of criticism recently, and that is the reserve bank ’ s so - called forward book. there is a lot of misunderstanding about this facility, perhaps because ‘ forward books ’ were used by many other central banks for completely different purposes. in many cases, misuse of the forward book contributed to the eventual downfall of financial markets. in the case of the reserve bank, a hedge facility is made available, mainly to south african residents, to protect them against exchange rate changes over which they have no control. these hedge transactions may only be entered into in respect of ‘ firm, ascertained and documented ’ commitments to make allowable balance of payments transfers within a 12month period. the reserve bank ’ s forward book is perhaps a misnomer, and should rather be referred to as an ‘ insurance policy ’ available to south african residents with foreign exchange exposures, either because they have to make payments in foreign currency or because they will receive payments in foreign currency within the next 12 months. the reserve bank ’ s forward book the therefore at any time represents a duplication of part of the stream of balance of payments transactions that will take place over the next 12 months. analysts often make the mistake of adding a net oversold position in the reserve bank ’ s forward book to their estimates of future balance of payments streams as an additional commitment of the country to make foreign payments. this is obviously wrong and must lead to a distorted assessment of the country ’ s overall foreign exchange position. by making use of this hedge facility, south african residents can transfer their exchange rate risk exposures to