FACTBOX-Key political risks to watch in Thailand

BANGKOK, June 1 (Reuters) - A semblance of order has been restored after gunbattles and arson attacks swept Bangkok in mid-May, but Thailand remains deeply polarised with no end in sight to a political crisis that is damaging the economy.

Thai 5-year sovereign credit default swaps THGV5YUSAC=MG are trading at a spread of around 145 after widening as high as 170 in May, their highest level in a year, driven up by tremors in the euro zone as well as domestic political instability.

Following is a summary of key Thailand risks to watch:

* POLITICAL INSTABILITY

Thailand is a nation divided. A colour-coded political conflict, broadly between royalists, urban elites, bureaucrats and the military on one side, and mainly poor anti-establishment protesters who feel politically and economically disenfranchised on the other, shows no sign of resolution.

On the contrary, it is becoming ever more destructive.

The anti-government protesters, or "red shirts", broadly support former premier Thaksin Shinawatra, ousted in a 2006 coup after demonstrations by royalist "yellow shirt" Thais. Thailand has had six heads of government and faced several disruptive showdowns since then, including a 2008 siege of Bangkok's airports and the cancellation of an Asian summit in 2009.

The latest bout of upheaval began with mass "red shirt" rallies in Bangkok in March, with the protesters then occupying a huge swathe of downtown Bangkok for six weeks until driven out by the military on May 19. The death toll from Thailand's worst political violence in decades is 88 with nearly 2,000 wounded.

Long seen an attractive destination for portfolio and foreign direct investment, Thailand is increasingly viewed as a regional basket case. A stock market .SETI rally in February and March fizzled out when violence erupted on the streets of the capital.

What to watch:

-- Conflict or compromise? Prime Minister Abhisit Vejjajiva proposed a "peace roadmap" in mid-May that included efforts to tackle social inequality and offered elections in November. This was broadly accepted by many "red shirt" leaders but hardliners in the movement demanded extra conditions and Abhisit withdrew the offer before the military moved in to crush the protest. A key question now is whether Abhsisit's government resumes efforts to find compromise or takes a hard line with the red movement.

-- A tough response seems probable -- Abhisit now says an election this year is "unlikely" and while a curfew has been lifted, emergency laws remain in place banning public gatherings of more than five people and there is strict censorship of media critical of the government. [ID:nSGE64S022] The top leaders of the red movement face heavy jail sentences. While a hardline stance may mean order is maintained in the short-term, it risks provoking a violent eruption of anger from the millions of Thais who support the reds, in Thailand's north and northeast as well as in Bangkok. The medium-term risks would be high and the worst case scenario would be a descent into civil war.

-- A conciliatory stance could reduce tensions and lower the risk of violent conflict. But elections are unlikely to solve Thailand's troubles and indeed may intensify them. Parties that are a proxy for Thaksin would be likely to comfortably win the polls, as they have every election in the past decade. That result would be unacceptable to the "yellows" and the military and a fresh bout of conflict would be almost inevitable.

-- Economic impact. The bloodshed halted more than six weeks of gains on the stock market. The vital tourism industry has taken a severe hit and consumer confidence hit a nine-month low for February and March. The Finance Ministry has said the unrest may have shaved more than a percentage point off GDP growth this year, but kept its 2010 growth forecast of 4-5 percent unchanged because of a strong first quarter -- the positive external environment is strongly boosting exports. [ID:nSGE64P0EG]

* THE ROLE OF THE MILITARY

Thailand's military and police have a congenital inability to keep out of politics -- the country has had 18 actual or attempted military coups in 77 years of on-off democracy. The military's last spell in direct charge of Thailand, after the 2006 coup, is widely regarded as an economic policy disaster.

What to watch:

-- Divisions in the military. The army backs the government, having played a big role in putting together the coalition. But cracks are appearing in the military along similar yellow-red fault lines as society. A widening of these divisions heightens the prospect of a coupby one faction, or more dangerously, a violent conflict between rival military factions. [ID:nSGE60E081]

-- Level of unrest and instability. A coup becomes much more likely if Thailand sees another bout of mass unrest on the streets. In these circumstances, a successful coup could boost markets in the short term, but the long-term impact on Thailand's attractiveness for foreign investors would be negative.

* THE KING'S HEALTH

The 82-year-old King Bhumibol Adulyadej has been in hospital since Sept. 19. Recent pictures appear to show he is in better health, but his illness has focused attention on what will happen when his reign comes to an end. A key issue in Thailand's political conflict is what role the monarchy and unelected elites should have in running the country. King Bhumibol is widely respected in Thailand so his political influence is accepted by most Thais. But his son and presumed heir, Crown Prince Maha Vajiralongkorn, does not yet command the same popular support as his father. Many Thais and political analysts fear if the crown passes to Vajiralongkorn while political divisions remain unresolved, opposing factions will intensify their struggle, with highly destabilising consequences. [ID:nSP507497]

What to watch:

-- Statements from the palace on the king's health. A troubled succession could have a major negative impact on stocks and the baht THB= and raise the risk of a sovereign downgrade.

-- Extent to which privy council members remain a focus of protests. Protests against the royal family are illegal, but the red shirts have targeted senior royal advisers. If privy councillors remain a focus for protests, this is a sign the succession may be less smooth and orderly than many hope.

* INDUSTRIAL ESTATE FREEZE

A surprise decision last September by a Thai court to suspend 56 projects -- initially 76 -- at the Map Ta Phut industrial estate, the world's eighth-biggest petrochemicals hub, has raised concerns about bureaucratic unpredictability and the competence of a government fighting fires on multiple fronts.

The freeze has affected projects worth an estimated $9 billion to $12 billion, with companies like energy giant PTT PTT.BK and Siam Cement SCC.BK, Thailand's largest industrial conglomerate, among those affected by an injunction ordered due to their failure to carry out environmental and health impact assessments as required by the constitution. [ID:nSGE617077]

What to watch:

-- In February, Abhisit announced proposals he hoped would get the stalled projects restarted in six to nine months, but many analysts say this is unrealistic. Meanwhile, prospective investors are looking elsewhere.

-- The political crisis. The government's ability to formulate and implement policy is being seriously disrupted.

(Editing by Andrew Marshall)