IN March of last year Barclays de Zoete Wedd (BZW), a British investment bank, made a foray into the Thai capital market by paying more than Bt600 million for local securities house Bangkok Securities. Today, nobody knows whether Bangkok Securities will even fetch Bt100 million.

BZW paid that price for Bangkok Securities at the height of the bubble economy. The firm went bust a few months later.

But then BZW, like most foreign and local investors, is still caught in the illusionary trap at the tail end of the era of excess. After a decade of spectacular economic growth of around eight to 10 per cent a year, it seemed unthinkable that the Thai economy would head for a crash landing.

Foreign investors, who held the Thai stock market at bay throughout its boom years, turned out to be not so smart. Over the past three years, in spite of their financial muscle and access to excellent research, they have been losing a great deal of money in Thai stocks.

During this period, when there was a huge build-up in money supply and credit growth, foreign investors were net buyers of Thai equities, while Thai investors were mostly net sellers. Foreign investors ended up losing money as the Stock Exchange of Thailand (SET) index plunged from around 1,493 in 1994, to 1,217 in 1995, and then ended 1996 below the 1000-point mark at 803.

Statistics for portfolio investment in 1994 are not available, but in 1995 foreign investors bought Bt427.01 billion (or a 27.82-per cent market share) worth of Thai equities while selling Bt379.89 billion (24.76 per cent). In 1996, their buying reached Bt456.57 billion (35 per cent), against sales of Bt444.22 billion (34.09 per cent).

But not until the second half of 1996 did foreigners begin to get out of the Thai market. Blue-chip equities fell from grace as a result, losing 40 to 50 per cent of their value. Overall, market capitalisation, or the value of all stocks combined, lost more than Bt1.3 trillion of its value in 1996. The wealth of the nation quickly disappeared down the drain.

So, what went wrong? The problem is largely due to the overly-optimistic economic figures of the Bank of Thailand, which did not send out any warning signals until it was too late. In July, then finance minister Surakiart Sathirathai was still issuing a soothing message that all was well with the economy, even though concern over the asset quality of financial institutions and property woes had been raised in the second quarter.

When compiling forecasts, central bank economists normally prepare three scenarios for internal use ­ expected, worse-than-expected, and better-than-expected. For unclear motives, Vijit Supinit, then central bank governor, always picked the better-than-expected scenario to portray the state of the economy. This over-optimism cost investors dearly as they jumped on the feel-good bandwagon which took them headlong into the bubble economy. Vijit also sat on the scandal at the Bangkok Bank of Commerce, which had already gone bust with debts of Bt60 billion to Bt70 billion. A cover-up was subsequently exposed, dealing a blow to the credibility of the Thai central bank's supervision of financial institutions.

To complicate matters, the Banharn administration did virtually nothing to meet investors' expectations: From its meddling in the central bank and exchange watchdog's affairs, to fiscal spending on big-ticket items without any regard for fiscal and monetary discipline.

The Banharn administration and the Vijit era succeeded in destroying confidence in the management of the economy. It will now be extremely difficult to boost the confidence of foreign investors, who have been fooled by lousy economic forecasts.

One only needs to look at the foreign exchange market, the money market and the capital market to understand how much confidence there is in the Thai economy. The baht has come under periodic attack due to doubts over macro-economic imbalances; liquidity in the money market is tight, forcing interest rates to stay high; and the stock market is drowning in a sea of turmoil.

At the current SET index level of 817 points, brokers' portfolios are depleted. Outstanding margin loans for stock trading currently amounts to Bt120 billion, which is strangling around 18,000 individual local investors. The authorities are not worried about the welfare of local investors now; they are more preoccupied with the more important task of saving the financial system.

In retrospect, if Thailand had a better government last year, the stock market would not have plunged as steeply as it did.

A market level of 1,110 to 1,200 points, where portfolios would not be losing money badly or where collateral from stocks pledged in financial institutions would not have gone rotten, would have made it easier for the present Chavalit government to tackle macro-economic imbalances.