sector financial institutions. the following three lessons must have come to the notice of many a private sector financial institution : ( i ) risk management models based on past experience or on rigid computer programmes do not necessarily provide adequate protection against potential losses in the new environment of financial globalisation. experience and discretion cannot be replaced by models and machines. ( ii ) the value of collateral against credit extension can disappear overnight ( vide the russian example ). ( iii ) excessive leveraging must be avoided at all times, and particularly in the present environment of volatile global changes ( vide the example of the long - term capital management fund ). governments, central banks, market managers, private sector institutions and private individuals all have learned once again from this experience that the excessive use of credit sooner or later leads to disaster. at this juncture, the world economy is paying a high price in the form of depressed growth for being reminded of these basic truths. 4. credit extension and the south african economy although the south african economy was also severely affected by the current world financial crisis, a sound banking system, well - managed financial institutions and effective financial markets protected the country against the almost total collapse of the economy, as happened in a few other countries. the reserve bank has some concern, nevertheless, for the increasing use of bank credit to maintain expenditure levels. the recent financial crisis forced exorbitantly high interest rates on the south african economy and borrowers of funds could not avoid sharp rises in the cost of servicing existing debts. the world financial crisis therefore hopefully also served as a grim warning to all south african borrowers and lenders that excessive debt positions should be avoided. neither the reserve bank nor the government can guarantee low interest rates or overall financial protection in the new environment of a worldwide integration of financial markets. it will also be foolish for south africa now to try to revive the domestic economy by creating an excessive amount of additional credit extended by banking institutions in a fragile global financial environment. such a policy could easily lead south africa also on the path of overall economic disaster, as more than one country in the rest of the world experienced over the past year. 5. conclusion i believe that members of this institute of credit management are aware of the potent danger of excessive debt positions, be it for countries, governments or private sector borrowers. the discipline of controlling this dangerous element of modern, sophisticated market economies, is not a responsibility only of the central bank. it is not only a problem of macroeconomic policy, but

, over time, restore equilibrium in their economies. these programmes inter alia provide for : • relatively restrictive monetary policies that must prevent further depreciation of the currencies to protect domestic institutions with outstanding foreign liabilities from further losses, and must eventually reduce inflation ; • the restructuring of the financial sectors through predetermined reform agendas in each country. public sector rescue operations must be supported by cost sharing sacrifices from the private sector, and prudential regulations for financial institutions must be tightened ; • improvements in public and corporate governance and a strengthening of transparency and accountability ; • a reduction in the dependence of public sector budgets on external funds, and fiscal provision for the costs of restructuring and recapitalising banking systems. the devastating effects of the crises can be illustrated by a few statistics from some of the affected countries. according to a recent world bank report, prices of key commodities, such as rice, increased by 25 per cent or more in indonesia, leading to food riots and major demonstrations against the government. unemployment is rising sharply and will increase the number of people living below the poverty line from 23 million to 40 million during the course of 1998. in korea, bankruptcies and unemployment are on the rise. eight of the thirty biggest conglomerates ( chaebol ) have filed for liquidation. unemployment is expected to increase from 500, 000 last year to 1. 2 million workers soon. in thailand, the slump in industry is severe. monthly sales of motor vehicles, steel, consumer electronic goods and durable consumer goods are now running at levels of 35 to 75 per cent down on last year. industrial output growth is expected to decline by about 50 per cent. in terms of the latest world economic outlook of the international monetary fund, the global economic growth rate for 1998 will be reduced by the east asian crisis from a previous forecast of 3½ per cent to not more than 3 per cent in 1998. this will have an adverse effect on world trade, and also on the export prospects for countries such as south africa. it further deteriorates the outlook for an early economic recovery in japan, and also holds adverse effects for many emerging market economies. 2. the south african situation the south african economy was so far relatively little affected by the east asian crisis. the foreign exchange market, and particularly the exchange rate of the rand, came under pressure for only a few weeks in october last year. prices on the johannesburg stock exchange were more directly affected, although the declines registered at that time were wiped