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ANALYSIS-Can Thailand break out of its downward spiral?

(For more stories on the Thai crisis click on [nSP470159]

SINGAPORE, April 15 (Reuters) - The colour of the T-shirts worn by the mobs of protesters paralysing Thai politics may change from time to time, but everything else about the country's damaging deadlock remains depressingly familiar.

Three years into Thailand's divisive political standoff, neither side appears anywhere near winning a decisive victory -- and as the fight drags on, the country's economy is losing.

"The whole vicious cycle seems set to continue," said Danny Richards, senior economist at the Economist Intelligence Unit.

Most foreign portfolio investors have fled. Foreign direct investment, already hit by the global financial crisis, is also under threat: the last thing embattled multinationals need as they weather a worldwide storm is a country with intractable political problems. And tourism, a key pillar of the economy, is damaged every time international TV networks broadcast footage of violent confrontations in the so-called "Land of Smiles".

Thai politics have always been colourful -- since it became a tentative democracy in 1932 there have been 18 coups or attempted coups, and more than 40 changes of head of government.

But investors used to count on the fact that while prime ministers rarely lasted longer than two monsoon seasons, the country had an efficient bureaucracy, reliable institutions and was a haven of calm in a turbulent region. No longer.

The World Bank's World Governance Indicators rated political stability at 44.7 out of 100 in 2003. By 2007 this had dived to 16.8, far below neighbours like Malaysia and South Korea.

Kristina Kazmi, Asia-Pacific analyst at IHS Global Insight, raised her Thai political risk rating to 3.25 in December, after protesters seized Bangkok's airports. She has raised the rating twice in the past half-year, from 2.75 in September. Ratings are from 1 to 5 -- the higher the rating, the greater the risk.

Thailand's overall rating, incorporating six types of risk (political, economic, legal, tax, operational and security) now stands at 2.93 out of 5. By comparison, Malaysia is rated 2.47, the Philippines 2.72, and Indonesia a much-improved 2.94.

On Tuesday, Standard & Poor's downgraded Thailand's local currency sovereign rating. In the midst of the worst economic crisis in decades, Thailand is rapidly slipping down the regional rankings as a worthwhile place to invest.

RED VERSUS YELLOW

In broad terms, Thailand's crisis is a battle between the "yellow shirts" -- royalists, the military and urban Thais, who back Prime Minister Abhisit Vejjajiva -- and the "red shirts" -- supporters of former premier Thaksin Shinawatra whose power base was mainly drawn from the country's millions of rural poor.

Bureaucratic and military elites have run Thailand for decades, with the poor excluded except during elections when competing parties would try to buy their votes.

When Thaksin swept to power in 2000, promising a raft of policies aimed at the poor, things changed. And despite being ousted in a coup he retains wide support among Thailand's dispossessed. The rural poor are now a political force, and the genie cannot easily be put back in the bottle.

"The rural population was content for a while to be excluded from politics, but when Thaksin came along they realised they could actually have a say, and you simply can't turn that clock back, even though the elites would wish to," Kazmi said.

The most likely scenario, analysts say, is that Abhisit hangs on for the moment but that the deadlock continues, with the "red shirts" demanding new elections. While it should be focusing on dealing with the impact of the global financial crisis, the government will remain distracted by political unrest.

Whenever new elections are held, pro-Thaksin parties could well return to power given the support he still commands.

But the military, the judiciary and the yellow-shirted mobs who occupied Bangkok's airports late last year would be likely to again seek to undermine any pro-Thaksin administration.

"As neither group has overwhelming superiority, the two camps cancel each other out and the country lurches from one extreme to the next every few months," Richards said.

ESCAPE ROUTES

Analysts see a few possible escape routes from the crisis.

If Abhisit can seize the moment after ending the latest unrest and reach out to the poor to consolidate his power base, he may be able to able to restore a semblance of stability.

Thailand's finance minister was quoted as saying this week he may boost the country's fiscal stimulus package to try to restore foreign and domestic confidence. If enough of that money is used in projects that benefit the rural masses, they may be won over.

Other solutions would be if Abhisit makes a deal with Thaksin -- although he has said he will not do this -- or if another unifying figure emerges to heal society's divisions.

Kazmi said any compromise would need to address the flaws in Thailand's constitution and agree on the proper role of the military and the monarchy in politics.

"One can identify these three core structural problems that need to be rectified in order for Thailand to move forward, but the big problem is there is no-one in Thailand now who actually commands the strength and the support and the respect to enact any of these changes," she said.

One unifying figure is King Bhumibol Adulyadej, widely respected by Thais whatever their political affiliation.

But while the king is revered, the role of the monarchy in Thai politics is a deeply divisive issue at the heart of the crisis. Many in the yellow camp support an interventionist monarchy, while the reds resent the power of Thai elites. But draconian lese majeste laws block public discussion of the issue.

Bhumibol's son and presumed heir, Crown Prince Vajiralongkorn, commands little of his father's popular support. And with the 81-year-old king facing regular health scares, the issue of royal succession could erupt at any moment and throw another explosive element into Thailand's volatile mix. (Editing by John Chalmers)

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