MALAYSIA'S decision to embrace exchange controls as a last resort to protect its downward spiral is a symptom of FUDD (fear, uncertainty, doubt and despair).

Thailand is also suffering from FUDD, yet it is praying that its good-boy image under the tutelage of the International Monetary Fund will pay off in the end. But for how long can Thailand hang on to the IMF's coat-tail if capital continues to flow out of the country?

Thailand's sovereign risks have increased as judged by a big jump in the spread of the Kingdom's bonds which are now traded at 900 basis points above the US Treasuries. This means that if Thailand plans to launch a global bond issue at this juncture, it will have to pay a US dollar interest rate of 14 per cent a year. Thai corporate bonds will be rated super junk, paying 2 to 3 percentage points on top of the sovereign bonds. At this prohibitive cost of funding, capital will only flow out of the country.

Faced with a similar situation, Dr Mahathir Mohamad, the Malaysian prime minister, must have weighed all viable options before deciding to take his country to the extreme course. The offshore ringgit market will be shut down, hence making it automatically possible to peg the Malaysian currency at a nominal rate of 3.80 to the US dollar. Mahathir believes that the wealth of the Malaysians should not be robbed further than this exchange rate.

A few months ago, he conceded that Malaysia might have to seek an IMF rescue package if the ringgit continued to come under speculative attacks and the Malaysian economy kept deteriorating. There had been no evidence whatsoever that Western countries would embark on any credible policy coordination to bring the global financial turmoil under control. That was his first sign of FUDD.

Mahathir has been a fierce critic of the IMF programme, which he says serves the interest of the foreign creditors, and the US hedge-fund operators and money managers, who, he charges, have stolen the wealth from several decades of Asian growth.

Recent signals from the IMF were not very encouraging for Malaysia because most of its remaining funding resources were likely to be poured into Russia to keep the former communist bastion from disintegrating. Relations between Malaysia and the US have been strained throughout the financial turbulence episode, making it difficult for it to secure the IMF package.

With a potential IMF shut-out and the prospect of continuing capital outflow, Mahathir thinks that the only way to save Malaysia is to stall the further downward spiral by curbing capital from freely moving out of the country. He is taking his country a step backward toward currency inconvertibility. By doing so, he will be able to fix the ringgit at an appropriate rate he deems fit and cut the interest rates the way he wants. Mahathir is not aiming for any upside gains, but is struggling to protect the further downside risks.

Malaysia now has about US$20 billion in foreign exchange reserves, and it intends to hold on to it tightly. With these reserves preserved to pay for imports and exports, Malaysia can then focus on propping up the economy through a lax monetary and fiscal policy. Malaysian residents, who hold the bulk of ringgit, will see their returns fall sharply once the expanding monetary policy takes place. Malaysia will suffer, but does it have any other choice?

Taking a parallel look at Thailand, it is obvious that Finance Minister Tarrin Nimmanahaeminda and the Bank of Thailand officials do not favour this radical course of rigid exchange controls. The cost to the nation will be enormous, for the relatively open economy and capital market of Thailand will be restricted to foreign investors, whose technology, capital and managerial skills are crucial to Thailand's growth. Top Thai policymakers believe that at least Thailand has the IMF to bank on, and the economic and financial structural reforms introduced so far have won critical acclaim.

But a year after swallowing IMF's bitter pills, economic recovery is still a slippery target. The latest forecast is that the Thai economy is likely to contract by 7 to 8 per cent this year and that next year it will grow at a flat zero rate to 0.05 per cent. This means that the size of the economy next year will be about the same as this year. In other words, things will be equally bad next year.

Save for a miracle, foreign capital will not return to Thailand to create a balance of payments surplus. If that is the case, it will be tough for the country to preserve its foreign exchange reserves, now standing at $26 billion, in the face of the capital outflow and dwindling stand-by credit from the IMF.

Creditors will be more reluctant to roll over their loans. If Japan gets into further trouble, if Hong Kong caves in to speculative attacks, and if the Russian rouble crisis spreads throughout the emerging markets, Thailand will have no chance to recover and will, under the IMF guidelines, have to go back to swallow the bitter pills of high interest rates again to stabilise its currency. If interest rates are to be raised again, the Thai economy will be pronounced dead.

Against this dooming scenario, it is no surprise that exchange controls are in vogue. Over the past week, Dr Virabongsa Ramangkura, one of Thailand's notable economists, has floated the idea that exchange controls are probably the last resort Thailand should consider seriously if it hopes to protect itself from further downside risks. He is not recommending any radical move because Thailand will simply abandon Article 8 of the IMF it embraced in 1990 and go back to adopting Article 14, which does not restrict current account transactions but curbs capital account transactions.

With Malaysia going for exchange controls, the IMF programme has been openly challenged. Since Plan A of the IMF to tackle the Asian financial crisis has been refuted, Plan B of exchange controls, as floated by Paul Krugman of the Massachusetts Institute of Technology in his recent article in Fortune magazine, is in the making. Plan A bets on a return of foreign capital and Plan B hinges on printing money to stimulate domestic demand, it will be interesting to see which plan will work out in the end. Both contrasting models cannot be right under the same circumstances because Plan A is market-friendly while Plan B emphasises self-reliance. But both models can be equally wrong because nobody knows the cure for the Asian crisis.