HYPERINFLATION of Latin American proportions will send the Thai economy reeling into disaster if the government fails to tighten its belt and sends the wrong signal about its foreign exchange policy, the Thailand Development Research Institute (TDRI) warned yesterday.

Institute president Chalongphob Sussangkarn said it was crucial that the government adopt strict fiscal and monetary policy and manage demand pressure if it was to keep the baht stable, combat inflation and win back macro-economic stability.

Lax fiscal and monetary policy would send a wrong signal to the financial markets, which would add downward pressure on the baht. Inflation would get out of control and the de facto devaluation would become a futile exercise.

Fortunately, Chalongphob said, Thailand does not have an ''indexation" mentality like some Latin American countries, where people rush to beat the inflation index by raising prices.

''A hyperinflation of 10,000 per cent is possible if prices keep on rising with the index to create an unending inflationary cycle. Some Latin American countries experienced this kind of cycle before," he warned.

''We have to be careful not to get ourselves into that cycle."

Chalongphob said the impact of the weakened baht, based on a likely scenario that the currency will hover around Bt29/US dollar, will be fully felt next year, when inflation reaches 9.2 per cent and economic growth stabilises at about 4.9 per cent.

This year the baht should average out at Bt27.40/US dollar if the target level of of Bt29/US dollar is achieved. In the first half of 1997 the baht averaged Bt25.80. It was only after July 2, when the baht was floated, at the beginning of the second half, that it had significantly weakened.

The TDRI bases its assumptions heavily on the government's ability to adopt fiscal and monetary policy. It said the full benefits of the de facto devaluation should be realised in 1999 when the economy would be back on track with a growth rate of 6.9 per cent, inflation at 4.4 per cent and investment increase at 6.8 per cent.

Again this forecast is based on a Bt29/US dollar assumption, a baseline the Bank of Thailand would also like to defend.

Deputy central bank governor Chaiyawat Wibulswasdi earlier signalled that the authorities would like to see the baht floating under the Bt30/US dollar range.

''The government must look after demand and spending carefully so that they do not increase at the rate of the currency depreciation.

''Otherwise, it will not help. It must also increase its tools to manage supply, which is a medium and long-term measure, by improving production efficiency," Chalongphob said.

Unlike Phatra Thanakit Plc, which predicts an economic recession this year as a result of the baht float, TDRI believes that there is ample room for growth in the economy due to the diversification of the economic system.

''We have a strong agricultural sector, service sector and diversified industrial base with foreign joint ventures, which make it unlikely for the Thai economy to sink into a recession," Chalongphob said.

Over a period of 30 years up to the sharp economic take-off in 1987, the Thai economy grew at an average of seven per cent a year, almost an auto-pilot growth with little guidance from the policy-makers.

The TDRI also presented an economic forecast in a Bt31/US dollar scenario which is also manageable, provided that the government adopts fiscal and monetary discipline.

But in the absence of fiscal and monetary discipline, with the baht averaging Bt29 in the second half of 1997, Bt31 in 1998 and Bt33 in 1999, inflation would climb to 6.8 per cent in 1997, 13.1 per cent in 1998 and 10 per cent in 1999.