With the macro-economy badly out of shape, the only way for Thailand to win back the confidence of foreign creditors is to drastically narrow the current account deficit.

The current account deficit, the gap between gross domestic savings and investment demand, is the key indicator that matters the most under the current gloomy economic environment. Bringing the deficit down will mean that Thailand is finally recognising its economic woes brought on by years of overspending.

On January 6, Finance Minister Amnuay Viravan clearly signalled that the government will tighten its belt by cutting the fiscal budget by at least Bt100 billion over the next two years. A few days later, Prime Minister Chavalit Yongchaiyudh made a surprise appearance at the Joint Foreign Chambers of Commerce to back Amnuay's vow, which will prevent a budget deficit and reduce Thailand's debt load to a more manageable level.

Chavalit's appearance is part of a strategic move to restore confidence by signalling to the international community that his administration is fully committed to the cause of guarding Thailand's stability. It is a commitment he and his economic czar will have to seriously follow through on, although they have not yet spelt out which programmes will be subject to spending cuts.

Amnuay will have no choice but to follow in the footsteps of the late Sommai Hoontrakool, a former finance minister who managed Thailand's fiscal budget with an axe in the early 1980s. ''You don't have to set a target for budget cuts. You just continue to cut beyond any tax revenue shortfall," Sommai once said about his ruthless approach to fighting instability.

Why is narrowing the current account deficit so important at this critical juncture? The answer is simple: Foreign creditors are increasingly casting doubts over Thailand's creditworthiness because its ability to generate foreign exchange has been severely hampered by a slowing economy and an export slump.

So, Thailand has to make an all-out effort to assure the international community that its current account deficit is sustainable. If confidence in the management of the Thai economy returns, foreign capital will start to flow back into the country and improve liquidity.

Without liquidity, there is no way for interest rates, which have been on an uptrend over the past three years, to decrease. High interest rates have been punishing Thai businesses and the stock market, which plunged 35 per cent last year.

To realise stability, budget cuts are the only answer. They will automatically increase the savings side and at the same time reduce demand for investment, hence narrowing the current account deficit, which is projected by the Bank of Thailand to reach 7.9 per cent (almost Bt400 billion) of gross domestic product (GDP) this year.

Financial markets will feel more comfortable if the current account deficit is narrowed by at least one or two percentage points as a display of Thailand's serious commitment to put its financial house in order.

Thailand cannot afford to run up a deficit of Bt400 billion every year from its current account, particularly if a significant portion of that deficit is financed by short-term foreign capital. Although Thailand's gross domestic savings is about 35 per cent of GDP, its demand for investment has reached 41 to 42 per cent of GDP. The balance, or a deficit in this case, is financed by foreign capital.

A look at the make-up of Thailand's total debt of about US$84 billion (Bt2,100 billion) causes concern. The private sector accounts for about 87 per cent of the debt while the government sector accounts for the remaining 13 per cent. This ratio is reversed in Indonesia (90 per cent public sector and 10 per cent private sector) and Malaysia (80 per cent public sector and 20 per cent private sector).

That is why Malaysia, which is running a current account deficit of nine per cent of GDP per year, is not the subject of concern by foreign creditors.

Worse still for Thailand, probably more than half of the private sector's external debt load is financed by short-term capital, which is the main reason Moody's Investors Service, the US credit rating agency, downgraded Thailand's short-term debt in September last year. A downgrade means that Thailand's creditworthiness is being questioned.

Both Moody's and Standard & Poor, another US credit rating agency, have not yet expressed their concern over Thailand's external debt level. They highlighted their concern over the rapid accumulation of short-term debts.