Thanong Khanthong and Vatchara Charoonsantikul discuss the game plan to overcome the present financial turmoil.

THE chief factor that has helped keep the baht relatively stable since the beginning of this year is a chunk of foreign money, buoyed by some confidence in the direction of Thailand's financial and economic reform, that has been pouring into the Thai stock market. But questions remain as to whether the Chuan Leekpai government has a grand strategy to keep this momentum going or a comprehensive game plan to bring the Thai economy back on track.

Impressed with Thailand's discipline under the IMF programme and its marked improvements in external accounts, foreign investors have been net buyers of Thai equities since the beginning of this year. Between January 5 and 29, their net buys amounted to Bt12.31 billion. They have scrambled to overweight their Thailand position for fears that they might miss the bandwagon when the economy bottoms out some time in the first half of this year.

As a result of the net foreign portfolio buys, the baht, which hit lows of Bt56.45 on January 12 against the US dollar, has been hanging tough at the Bt53-Bt56 range despite the continuing pressure of Thai corporates to repay their staggering foreign debts.

The financial markets have been buoyed further by an announcement yesterday that the two-tier currency system, which separated the offshore from onshore markets since mid-May last year to prevent a speculative baht attack, would be abolished. The baht rallied a strong one-day gain by more than Bt3 against the US dollar, climbing to around Bt52.00.

The euphoria hit a feverish pitch with the SET index soaring 47.99 points, or almost 11 per cent, to 495.23. Bank stocks rallied on big gains, with Bangkok Bank surging Bt13.50 to Bt87.50 and Thai Farmers Bank jumping Bt16.00 to Bt86.00.

''Apart from the Korea factor and signals that the IMF might give more flexibility to Thailand's restructuring programme, US President Bill Clinton's strong show of support to Asia has buoyed foreign investors' confidence in the region,'' said Pipat Ronnakiat, chief securities analyst at Adkinson Securities Co.

The sentiments were also boosted by economic stabilisation as reported by the Bank of Thailand. Imports in November contracted by 30.4 per cent, sending the trade balance to a surplus by US$844 million. With the service account also achieving a surplus of US$153 million, the current account continued to improve for the third consecutive month by registering a surplus by US$997 million.

Analysts say the Chuan administration should not miss this honeymoon period to act tough, keep the momentum going, learn from South Korea and avoid repeating the same disastrous mistakes as Indonesia. The euphoria will soon end if there are no further measures to deal more effectively with the banking crisis, tackle short-term external debts, raise more tax revenue to meet government expenditures, ease liquidity and restructure the Thai corporates and the fundamentals of the economy.

Sirichai Sakhonrattanakul, a senior executive of the Industrial Finance Corporation of Thailand (IFCT), recently said the Chuan government had missed its golden opportunity to show its leadership by failing to raise the oil tax when it took over in November. Raising the oil tax, he said, would help consolidate the government's fiscal position, save foreign exchange and send a clear signal to the markets that Thailand is willing to bite the bullet.

He also urged the Chuan government to demonstrate stronger leadership by mobilising a comprehensive programme to raise domestic savings, mandatory or voluntary. ''We've got no choice but to rely on ourselves. The reason that Singapore or Malaysia are not worse off than us or Indonesia is that they have a mandatory savings programme. It's never too late to act. But we've got to do it now,'' he said.

For the Thai banking system to bounce back and resume lending, it must be able to raise a combined Bt350-Bt450 billion in fresh capital. The recent surge in bank stocks should be a big bonus for the big banks, which will be able to command a higher premium for their new issues. After taking over Bangkok Metropolitan Bank (BMB), the authorities also need to take tough measures against the weak banks so that the system is cleaned up within the first quarter of this year.

''If there are announcements of the recapitalisation of the big banks, I will re-rate Thailand and signal that the investors should pay more attention to Thailand,'' said Nikhil Srinivasan, vice president of Morgan Stanley Asia Ltd.

By that time that Thai assets, stuck in the defunct finance companies, are auctioned off in a big way and big Thai corporates as well as banks report massive losses, most analysts agree that it will signal a bottoming out of the economy.

At the heart of the Thai financial crisis is the rising non-performing loans (NPLs), which are expected to reach Bt1.3 trillion or 25-30 per cent of total loans. So far the comprehensive measures to deal with this mountain of bad assets have not been worked out.

The Financial Sector Restructuring Authority (FRA) will only be liquidating the bad assets of the 56 suspended finance companies. Despite regulatory approval for the creation of the ''bad bank'' or Asset Management Corporation (AMC), this agency has yet to start working on cleaning up the remaining bad assets in the banking system. Nor is there any certainty over the source of its funding.

Converting Thailand's short-term debts into longer-term debts is necessary if the baht is to avoid further selling pressure. South Korea scored an impressive drive in preventing its currency and economy from going down the drain after it and the foreign banks reached agreement last week on debt restructuring. Under the deal, foreign creditors have agreed to convert some US$24 billion in short-term loans into one- to three-year loans with the South Korean government's guarantee.

This remarkable refinancing plan will ease the pressure on the won and solve the country's short-term liquidity crisis. It will also cut South Korea's short-term debts to 32 per cent from 64 per cent earlier. The deal may convince Standard & Poor's to upgrade South Korean's foreign currency debts from B+ to BB+. But Moody's Investors Service has said it had no immediate plans to change Seoul's credit rating.

Kim Dae-jung, the new president, will take office on February 25 and is expected to implement the tough reforms needed to bring his country back on track.

Indonesia, which posts total foreign debts of US$140.3 billion, is a good example of a country that has made all the wrong decisions. It has flouted the budget discipline and has not been decisive enough to tackle its financial system. President Suharto is also facing a leadership crisis. There is a growing threat of social unrest and political turmoil. Only last week after the announcement of a debt moratorium for more than 200 corporates did the Indonesian government step in to guarantee the deposits and debts in the financial institutions.

From R2,500 against the US dollar, the rupiah crashed to R16,500 on January 22 to push the economy into a dramatic meltdown. Talks with foreign creditors on rolling over the short-term debts are not likely to bear fruit without government intervention or guarantee. If the talks fall through, the rupiah will come under renewed selling pressure.

Kleo-thong Hetrakul, chief economist of the Bank of Thailand, has confirmed that Thailand will be following South Korea's model in solving its short-term liquidity crisis. But she did not elaborate on the timing.

Of more than US$70 billion in private debts, some US$39 billion were short-term as of the end of 1996. The strategy is to extend the maturities of these short-term loans into three to four years so that the pressure of dollar repayments will not put further downward pressure on the baht. The further the baht plunges, the tighter monetary policy is needed to hold it stable, the reason that short-term rates have shot up to 23 per cent to 24 per cent. The high rates and tight liquidity, in turn, are killing the economy.

Of Thailand's total private debts, about US$30 billion represents corporate debts and US$40 billion private bank debts. Thai corporates have already committed a de facto moratorium on their foreign debt repayments after the baht lost more than 50 per cent against the US dollar. The danger lies in private bank debts, which should not be allowed to default.

''Just let the corporates default on their foreign loans,'' said a general manager of a BIBF bank in Bangkok. ''But the government should step in to help the financial institutions overcome their foreign debt burden because they are at the heart of the financial crisis, which must be resolved.''

If parts of the private bank debts are guaranteed by the Thai government, chances are high that their maturities would be lengthened to three or four years. Liquidity should improve dramatically if the negotiations with the creditors are successful like South Korea.

The most challenging job facing the government is how to bring the debt-ridden Thai corporates back on their feet. The damage has already been done. The gigantic amount of debt burden they are shouldering has killed their viability. If the Thai corporates are to remain competitive, a wholesale restructuring will be inevitable.

Today the Thailand Development Research Institute (TDRI) is scheduled to present its report on the medium-and long-term restructuring of Thai industries. Its recommendation will have to be carefully thought out as it will amount to a national survival strategy. Chuan's showcase at the World Economic Forum and Finance Minister Tarrin Nimmanahaeminda's recent trip to Washington DC won't improve the prospects of the Thai economy, if the measures to restructure the fundamentals of the Thai economy are not worked out.