Factbox: Key political risks to watch in Thailand

Policemen stand behind barricades during a rally by supporters of the People's Alliance for Democracy (PAD) near the Government house in Bangkok February 7, 2011.

BANGKOK (Reuters) - Thailand is bitterly polarized with no end in sight to a long-running political crisis that has hurt tourism and dented business confidence. An emergency decree in the capital has been lifted and peace prevails for now, but few in Thailand believe it will last.

Thailand's export-led economy, however, is in good shape, but rising inflation remains a risk. The central bank has forecast economic growth of 3.0-5.0 percent this year and 8 percent for 2010. The baht currency has weakened following an 11 percent gain in 2010, which hurt exporters and sparked fears about imposition of capital controls.

Following is a summary of key Thailand risks to watch:

POLITICAL INSTABILITY

A color-coded political conflict, broadly pitting "red" urban and rural poor against "yellow" royalists, urban elites, bureaucrats and the military top brass, shows no sign of resolution and protesters of both camps are holding rallies.

Despite a government-backed move to reconcile the differences, divisions are running deeper and wider, with cries of injustice growing louder. Thailand has had six heads of government and several disruptive showdowns since a bloodless coup ousted tycoon Thaksin Shinawatra as premier in 2006.

The country has since been plagued by paralyzing, at times violent street protests, the occupation of government offices and international airports, bombings, arson attacks, assassination attempts and clashes between troops and demonstrators.

The yellow-shirted People's Alliance for Democracy (PAD) has been protesting in Bangkok over the government's handling of a long-running border dispute with Cambodia. The issue has flared up with repeated exchanges of fire between Thai and Cambodian soldiers at the border since February 4.

At least five people have been killed and some analysts say the PAD and ultranationalist elements in the Thai military may be conspiring to escalate the conflict as a way of undermining the government of Prime Minister Abhisit Vejjajiva.

The Thaksin-allied United Front for Democracy Against Dictatorship, or "red shirts" held two peaceful rallies last month of more than 30,000 people, showing the movement is still a political force to be reckoned with.

Thailand's military and judiciary, both of which analysts see as influenced by the country's establishment elites, have had a hand in either undermining or helping governments, actions that have gone against UDD demonstrators.

Two ruling parties led or backed by Thaksin have been dissolved by the courts. Acquittals of the ruling, pro-establishment Democrat Party in two dissolution cases late last year fueled UDD claims that the courts are not acting independently.

The latest bout of upheaval began with mass red shirt rallies in Bangkok last March. The protesters then occupied a huge swathe of downtown Bangkok for 10 weeks until driven out by the military on May 19. The death toll from Thailand's worst political violence in modern history was 91 with more than 1,800 wounded.

The government says it wants to promote reconciliation but has taken an extremely hard line with the red shirt protesters, and 19 UDD leaders are in jail on terrorism charges. By contrast, PAD leaders who led the 2008 airport blockade are free on bail.

The government appears reluctant to press the military to reveal to investigators its records of operations during the crackdowns. A preliminary probe by Thailand's Department of Special Investigation, leaked to Reuters, shows troops may have played a bigger role in civilian deaths than the authorities have admitted.

However, there are signs of a softening of the government's stance. In December it lifted a controversial emergency decree in place for eight months in Bangkok and its surrounds and is seeking bail for detained protesters. However, security agencies can still use an Internal Security Act to permit arrests, detentions, surveillance and censorship.

What to watch:

-- Border clashes. Is Abhisit in control of the situation, or are ultranationalist factions formerly allied to him forcing an escalation of events in order to undermine him?

-- Arrests and detentions. These actions have helped maintain security in the short-term, but they also risk provoking Thais who support the reds in the north and northeast, as well as in Bangkok.

-- Protests. Rallies have continued, showing the UDD is capable of re-grouping. But without strong leadership, there are concerns "red" radicals could emerge. If community radio stations crucial to garnering UDD support are shut down, it could trigger a backlash. Though small in number right now, the PAD has shown it can mobilize big crowds and if it carries out veiled threats to occupy Prime Minister Abhisit Vejjajiva's offices, trouble could be ahead.

-- General election. A new poll is due some time in 2011 and house dissolution is "possible" in April, Abhisit said on January 26. However, regardless of the timeframe, a poll is unlikely to solve Thailand's troubles and may indeed intensify them. Puea Thai, a proxy party for Thaksin, could win the polls, as his allies have every election in the past decade. This might be unacceptable to the "yellows" and many in the military, making heated protests, or even a pre-emptive coup, possible. If Abhisit prevails and the poll is tainted by cries of foul play, the UDD could stage more crippling and potentially violent rallies.

-- Court cases. Prosecutors are pushing ahead with terrorism cases against UDD members and leaders while probes into the siege of Bangkok's airports by yellow shirts in 2008 are moving at a snail's pace. A public perception of unfair verdicts would underline one of the key grievances of the red shirts: Double standards in justice.

POLITICISATION OF THE MILITARY

Thailand's military and police are deeply entwined with politics. The country has had 18 actual or attempted military coups in 78 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 top brass back the government, having played a big role in putting together the coalition. But there are cracks along similar yellow-red fault lines as society and if this were to intensify, a split in one of Thailand's most solid institutions would be bad news.

-- Rumors of coups. The military's powerful stake in politics means they come around often, and worry markets. Thailand's baht currency fell back toward a 4-month low on January 28 due to a weak spell on the stock market which was compounded by speculation of a putsch the government said was "inconceivable". It remains unlikely at present - even if the army may not be entirely happy with Abhisit, their alliance has been mutually beneficial. But the clashes with Cambodia have fueled speculation that some hawkish generals could use the issue as an excuse to seize power.

-- General Prayuth Chan-ocha. The royalist, pro-establishment army chief has a zero-tolerance approach to the red shirts, having been involved in many operations against them. He has filled top positions with close allies drawn from a circle of generals known as the "Eastern Tigers".

His tough stance risks provoking the UDD and his leadership has potential to sow discontent in the military by effectively blocking career paths of soldiers not in the same clique.

INFLATION

The Bank of Thailand sees inflation as the key risk factor for Thailand's economy in 2011. Its governor said on January 26 it still sees the need to normalize interest rates "for a while".

The central bank raised its key policy rate by a quarter point to 2.25 percent last month, its fourth increase since July 2010, to curb inflationary pressure and economists expect a similar rise when it meets on March 9.

The central bank said rates were on the rise and that core inflation this year could exceed the top of its target range of 0.5-3.0 percent, which it uses to guide monetary policy. The governor said "ultra-loose" policy will push up inflation and create economic imbalances.

What to watch:

Increases in food prices, domestic consumption. This would push inflation up. The government has fixed prices of about 30 food items and has ordered producers of major consumer products not to raise prices of good. There are plans to extended government food subsidies further. Any change in these policies could raise inflationary pressure.

THE KING'S HEALTH

The 83-year-old King Bhumibol Adulyadej has been in hospital since September 2009. The most recent pictures appear to show him 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 respected in Thailand and his political influence is accepted by most Thais, but leaked diplomatic cables show doubts among key royal advisers about the suitability of his son and heir, 58-year-old Crown Prince Maha Vajiralongkorn. Many Thais and political analysts fear if the crown passes to Vajiralongkorn while political divisions remain, opposing factions will intensify their struggle.

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 and raise the risk of a sovereign downgrade.

-- Public criticism of privy council members. Protests against the royal family are illegal, but some have dared to criticize palace advisors, suggesting succession may be less smooth than many hope.

LEGAL AND REGULATORY UNPREDICTABILITY

Thailand's government has been embarrassed by two court orders affecting its industrial and telecommunications sectors, denting its credibility among foreign investors. Both cases center on the state's failure to appoint independent bodies as required by the constitution.

A Thai court stunned the industrial sector in September 2009 when it halted dozens of projects at the Map Ta Phut industrial estate for failing to undertake health and environmental assessments supposed to be overseen by an independent body the government failed to set up.

In a similar case, an auction for third-generation mobile phone services to transform the $4.7 billion sector was abruptly canceled last September because a court ruled that the telecoms regulator did not have the authority to offer licenses.

A new regulator, the National Broadcasting and Telecommunications Commission, was created in December but it could be a while before its board is appointed. To fill the 3G gap, the government has asked two state-run companies to help private operators develop 3G services on existing networks. The bidding process is already underway.

What to watch:

-- Regulatory bodies. The government has twice paid the price for its failure to establish bodies required by the constitution. More foot-dragging on other issues could indicate whether these issues are a priority or not.

-- Political, coalition instability. Political problems have been a big distraction for the government. More turmoil and coalition disunity would make it difficult to draft and push through necessary bills, meaning more delays and uncertainty. (Editing by Daniel Magnowski and Andrew Marshall)