Moody's Investor Service sends a message that the worst is yet to come, Thanong Khanthong writes.

ALATE afternoon rally, apparently based on government intervention, saved the panic-stricken stock market from crashing by almost 5 per cent in a single day following a stern warning by Moody's Investor Service, the US credit rating agency, that it has placed the long-term debts of Thailand on review for a possible downgrade.

Without the intervention, the stock market would have crashed further to threaten a systematic breakdown of the Thai financial system.

Yet, for how long will the support be there, given the rapid draining of ammunition from cash-strapped mutual funds, banks' and brokers' portfolios as a result of the free fall of the stock market.

Last year, the stock market shed more than 35 per cent. Already this year, it has lost 11.2 per cent.

A local mutual fund manager described the situation as grave, ''to the point you can say that it is a financial meltdown.

''The bond market is also dead. There is virtually no trading at all, save for Thai Farmers Bank and United Communication bonds. The UCOM bond yield has shot up by 100 basis points."

Barely six months ago, Moody's sent tremors through the Thai financial system by downgrading Thailand's short-term debts due to its concern over a sharp increase in the nominal value of Thailand's external debt.

The country's external debts rose from US$24 billion (Bt624 billion) in 1990 to about $77 billion at the end of 1995. By September 1996, the total external debts hit $89 billion, about Bt2.3 trillion or half of the country's gross domestic product (GDP).

More significant to Moody's was a rapid change in the maturity structure of Thailand's external debts, which increased the vulnerability of the country's balance of payments to any shock ­ whether precipitated by a domestic or foreign event.

The Bank of Thailand questioned the statistics gathering of Moody's, arguing that the build-up of the short-term foreign debts was in fact a technical if not an accounting problem. It argued that most of the short-term debts were in fact long-term debts disguised as offshore or BIBF loans, yet were booked as short-term loans.

Nevertheless, Moody's stood firm on its decision to downgrade the rating of Thailand's short-term debts, the immediate impact of which raised the borrowing costs of Thai corporations on international financial markets by another 50 basis points.

At that point, the stock market was hovering at 1,053.

The Moody's downgrade marked the razor thin edge that put Thailand on a watch list and heightened growing concern over the status of its credit worthiness and macroeconomic stability.

Save for a handful blue-chip companies, most Thai corporations found it increasingly difficult, if not impossible, to raise money on international financial markets in the second half of 1996.

Then Moody's warned that it was keeping a close watch on Thailand's long-term debts. ''The spillover effects of any financial instability may also have negative implications for Thailand's long-term currency debt ratings," it said.

There was a suggestion from Moody's that ultimately Thailand needed to reduce its high level of dependence on foreign savings to finance its economic growth.

''This means that either the investment rate must decline or domestic savings must increase. The main focus of policy is to raise savings. But if the domestic savings rate remains stubbornly well below the investment rate, other adjustments in economic policy may be required," the US credit rating agency affirmed.

The Thai economy ended 1996 with a resounding thud. It crash-landed at economic growth of 6.7 per cent ­ the lowest level in a decade and was being compounded by growing macroeconomic problems.

Without any serious attempts to bring down the current account deficit, this Achilles heel will continue to haunt Thailand in 1997.

The gap between domestic savings and investment demand, or the current account deficit which is being financed by foreign savings, has reached Bt400 billion a year.

With this big gap, foreign creditors have begun to question Thailand's ability to service its external debts amid the sharp economic slowdown, property market slump and deteriorating asset quality of financial institutions.

To complicate the management of macroeconomic stability, the baht has come under attack by dealers who have spread the groundless rumour that Thailand will eventually need to devalue its currency.

The panic over the currency has raised the swap premium of the baht/US dollar trading, enabling those who earlier sold the baht short for the dollar to pocket profits by closing their positions.

The attack amounts to a challenge on Thailand's sovereignty and the Bank of Thailand has been forced to tighten monetary policy.

The last thing on the central bank's mind is a currency devaluation. The baht has been kept tight to prevent speculators from borrowing it and selling it short for the dollar.

Yesterday, Moody's followed through on its warning to Thailand by stating that it is reviewing Thailand's long-term debts due to concern over the soundness of the financial sector, in which a large portion of the recent accumulation of short-term foreign currency debt has been concentrated, as well as by constraints on macroeconomic policy-making.

''Financial institutions, particularly finance companies, have built up an exposure to the property sector and are now experiencing an increase in non-performing loans as a result of the slowdown in economic growth," it said.

''In addition, other problems in their loan portfolios may yet emerge since Thailand's export-oriented industrial sector is experiencing financial strains in the wake of last year's dismal trade performance," the rating agency added.

It is of no surprise that Moody's is placing Thailand's long-term debts under review for a possible downgrade because the stock market has lost around 30 per cent since September when it downgraded Thailand's short-term debts.

Thai financial assets are linked to the performance of the stock market but have been wiped out in a flash.

Yesterday, the market closed at 713.48, against 1,053 on Nov 5.

The Chavalit administration has made the right direction in promising to cut 1997 fiscal spending by Bt99 billion, which will reduce aggregate demand in the Thai economy.

Yet that act must be followed up with the combination of a further reduction in public sector investment and private consumption of dollars.