May 12, 1999 -- Dr Pisit Lee-artham, the deputy finance minister, talks to Vatchara Charoonsantikul and Thanong Khanthong.

IN May and June last year, Thailand's top economic policy-makers such as Tarrin Nimmanahaeminda, the finance minister, MR Chatu Mongol Sonakul, the governor of the Bank of Thailand, and Dr Pisit Lee-artham, the deputy finance minister, came out to assert that an exchange rate of Bt37-Bt38 to the US dollar was acceptable to the country.

Few believed them then, for there had been an absence of a track record to support this range. Besides, over-reactions after the baht devaluation had sent the baht to an all-time low of Bt56 to the US dollar the previous January. When the Thai authorities began to loosen their fiscal and monetary policy in August that same year, market talk intensified over expectations that the baht should weaken further to boost exports and in response to the downward trend of interest rates.

The baht has been remarkably stable for a full year now, hovering around the Bt37-Bt38 range. ''Now when we say that this exchange rate level is what we're happy with, it carries more weight due to growing confidence,'' says Pisit in an interview last week. He adds that at this point the exchange rate stability can be attributed to the macro-economic stabilisation programme instituted from the very beginning, in addition to passage of the economic reform laws and improvements in the manufacturing index between January and March this year, after the index registered a negative figure for 20 consecutive months.

Moody's Investment Services, the US credit rating agency, had taken a close look at these developments before upgrading its outlook for Thai sovereign ratings and the ratings for the country's four big banks. These days Thailand is flush with good news. The Bank of Thailand announced that the non-performing loans in the banking system had peaked at 46 per cent of total loans. Siam Commercial Bank became a watershed deal for Asian countries outside Japan last month when it succeeded in raising US$500-$600 million in direct investment from foreign institutional investors in Asia, Europe and the United States. The stock market has rallied by more than 40 per cent since the end of March. News over the impending acquisition of the Nakornthon Bank by the Standard Chartered Bank has also lifted market sentiment.

The ratings outlook upgrades have led to stronger demand for Thai sovereign bonds traded overseas. According to a Barclays Capital report published on May 5, the spreads of the Thai bond issue, due for maturity in 2007, had been narrowing significantly against the US treasuries, falling from 330 basis points on Jan 4 to 290 basis points on February 1, 270 basis points on March 1, 235 basis points on April 1, 185 basis points in May 4, and 175 basis points on May 5. The narrowing of the credit spreads reflects improved sentiment about Thailand.

''Despite all the positive signs, we cannot really say that we have graduated from the crisis. We're just making a turnaround. There is a risk of sliding back into the crisis again if we're complacent,'' warns Pisit.

Still, it is worth examining why the baht stability defies the abnormally low interest rate environment. In other words, the authorities have been able to bring down short-term rates to 1.25 per cent without compromising exchange rate stability. Pisit explains that the foreign exchange rate and the interest rate do not correlate because Thailand is still in an abnormal economic environment, with production over-capacity, high non-performing loans in the banking system and excess liquidity in the money market.

''Due to these abnormal conditions, the foreign exchange rate has completely been separated from the interest rate,'' he says.

Besides, capital outflow has been matched equally by capital inflow to help maintain exchange rate stability. Over the past two years, some US$20 billion has been pulled out of Thailand to create a balance of payments crisis. Yet between the final quarter of 1997 and the final quarter of 1998, capital inflow from the current and service accounts reached $20 billion, to perfectly match the outflow. Thailand's current account averaged a surplus of $1.1 billion last year, and is expected to continue to stay at this $1-billion-a-month-surplus level until the end of the year.

Pisit also argues that earlier calls for the government to pursue a more appropriate baht policy to boost exports have been proved unjustifiable. The baht's stability reflects the macroeconomic adjustment of the Thai economy in the current account. ''If the trade surplus begins to narrow, then the foreign exchange mechanism will adjust itself to render a weaker baht. Since we're now having a floating exchange rate policy, any change to the market will be market-oriented,'' he asserts.

From a broader perspective, the International Monetary Fund, which provided Thailand with a $17.2-billion rescue package, is not likely to support a policy biased towards a weaker baht to boost exports. For this policy could lead all the other neighbouring countries in the region, who would also like to export their way out of the crisis, to follow suit, thus triggering another round of the financial crisis.

Despite the inflow of portfolio investment to the tune of Bt20 billion over the past three weeks to trigger the stock market rally, Pisit remains cautious over this short-term sentiment. ''Of course, the rally boosts our morale and gives us more confidence to continue our job. But there remain several tests that Thailand has to overcome, ranging from implementation of the key economic laws, disbursement of the Miyazawa Plan, restructuring of the corporate debts.

The market is waiting to see how the bankruptcy and foreclosure process will unravel. It is a big test case,'' Pisit says.