Stronger national leadership is needed to restore the confidence in the economy necessary to allow interest rates to fall, Vatchara Charoonsantikul and Thanong Khanthong report.

Following a meeting of the Exchange Equalisation Fund on Wednesday, Finance Minister Amnuay Viravan signalled long-term interest rates should be allowed to fall.

He tried to find solace in improved macroeconomic stability, with inflation expected to fall to 4 per cent this year and the current account deficit to narrow to 6 per cent of the gross domestic product.

After reporting disappointing February figures, Amnuay hinged his hopes on an export recovery in March based on the growing number of exporters' and importers' foreign exchange transactions being processed by the Bank of Thailand.

But Amnuay's comments lack sufficient credibility. Rates are unlikely to fall in the foreseeable future, unless the central bank stops confusing the public with its management of macroeconomic monetary policy.

Opinions at the top decision-making levels appear to be divided over how or when interest rates should be cut.

Assistant central bank governor Siri Ganjarerndee said he is afraid that the spending cuts are not steep enough to warrant the easing of credit restrictions.

The BOT has exhausted its monetary tools and only just convinced politicians to adopt an austere fiscal policy. The 1997 budget has been cut by Bt100 billion, which is expected to reduce the current account by 1.2 per cent of the GDP.

If Siri's view is correct, politically it is still impossible to deepen the 1997 budget cuts to give monetary policy setters more room to ease the credit crunch. That is the reason why Amnuay kept quiet when it was suggested he should go for deeper budget cuts to cure the country's macroeconomic ills.

Dr Chaiyawat Wibulswasdi, the deputy governor who anticipated an improved fiscal position for the government in the second half of 1997, says market mechanisms will take over if interest rates are allowed to fall. Rerngchai Marakanond, the central bank chief, suggested that the BOT would not intervene in the money market, allowing the rates to adjust themselves automatically. He indicated that short-term interest rates have been brought level at 8 to 8.5 per cent for a while. He could not predict when long-term interest rates would fall, saying that depended on market mechanisms.

Contrary to what Rerngchai has said, the BOT has been an active interventionist in the money market. It has issued bonds worth Bt20 billion to drain money out of the market.

A recent inflow into the market of Bt70 billion of the Central Provident Fund has also been sterilised by the BOT.

Of this amount, the Fund for Rehabilitation and Development of the Financial Institutes has drained Bt30 billion into its coffers. This money will be used to back the promissory note holders of the finance companies and bail out sagging finance companies. The remaining Bt40 billion has been sitting idle in commercial banks as fixed deposits.

So how can interest rates fall if the BOT keeps draining the money out of the system? The BOT is afraid that the massive influx of the Central Provident Fund will trigger too rapid a fall of interest rates. At a time when the economy is heading toward its most sluggish growth rate in a decade, with private investment plunging in February this year, it is worth looking at what further cost economic growth should be sacrificed for economic stability.

The banking authorities have been arguing that interest rates have to be kept high in order to protect the exchange rate system. They won the first round of the battle to defend the baht by spending more than US$2 billion (Bt52 billion) of the BOT's international reserves. As Amnuay admitted in February, ''we have won the battle of the baht, but we have not won the war". The necessity of defending the baht means that interest rates are likely to remain high throughout the year.

Another crucial factor is the total absence of confidence in the management of Thailand's macroeconomic policy. Without confidence, private capital will not flow into the country to provide the necessary liquidity for the financial system.

Banks, stuffed with deposits beyond what they can use, have adopted wait-and-see policies and will not lend the money.

In contrast, finance companies are cash-strapped, weighted down as they are by a mountain of bad property loans.

Businesses cannot raise funds because no one is willing to give them the money. Good companies have felt the pinch because they cannot access fresh funds, unless at prohibitive cost, to expand or just continue their business. The taps on the flow of money into the system have been shut.

It appears that financial officials would like to keep support for the stock market at the 700 level, to avoid precipitating another financial sector crisis. Yet this effort could be in vain because the market cannot move sideways for too long.

If it does not go up (and there is little support for that), down it will go.

The lack of positive news for exports or the economy makes it possible that the SET index will plunge further. Yesterday it fell 1.37 points to 688.42 on the release of the disappointing export figures.

Standard & Poor's, the US credit rating agency, made several observations about future loan losses and the extent of government support for the financial sector in a recent report.

''Reflecting a less optimistic base case scenario than that currently held by the Bank of Thailand, S&P believes that official support for both creditors and borrowers could ultimately reach as much as 6 per cent of 1997 GDP," it said. ''This compares with support equivalent to 2 per cent of GDP implied under government's recently announced financial package."

S&P's estimates mean that the Thai government must dig Bt300 billion ­ not Bt100 billion ­ from its pocket to bail out the financial sector, which is depressed by the property sector.

Scrambling to change Thailand's debt profile, Amnuay went on a roadshow to sell $600 million in Yankee bonds. The 10-year bond was priced with a coupon of 7.85 per cent or at a spread of 90 basis points above Treasury bills of the equivalent maturity. The over-subscriptions of $400 million for the 10-year bonds indicated a restored investor confidence in the Thai economy, according to Lehman Brothers, one of the lead managers.

But it will take time before the money from the Yankee bonds will start to flow into Thailand, which will be used largely to retire the foreign exchange debts of state enterprises. The indirect effect will be an easing of liquidity which will help to lower interest rates.

Amnuay is the Cabinet member shouldering the greatest burden for preserving Thailand's economic well-being, but he is not quite prepared to deal with the current economic crisis, which was precipitated by years of economic mismanagement. The remainder of his ministerial colleagues are so irrelevant that they even confuse the financial markets and the private sector in their eagerness to spend.

It boils down to the need for stronger leadership by Prime Minister Chavalit Yongchaiyudh, who must take a more decisive stance in tackling Thailand's macroeconomic problems. More bullets will have to be bitten, particularly on the fiscal side because revenues will not be coming into the government's coffers given such sluggish growth. Without a clear direction, the private sector does not know how to plan for the worst, or for the better.