BANGKOK, July 20 (Reuters) - Thailand's worst floods in half a century, which hit the country late last year, ruined large parts of the central Thailand's Chao Phraya river basin, killed more than 600 people, devastated industry, and are slowing economic growth.
Prime Minister Yingluck Shinawatra is standing by a policy of sharp wage increases that have forced some firms to consider leaving Thailand. The prime minister believes a fall in the baht currency would help exporters hurt by the floods.
Yingluck took over in August 2011 after an election that many Thais hoped would heal divisions that triggered street violence in 2010, but Thailand is still politically polarised in broadly red vs. yellow, colour-coded camps and any number of issues could be the flashpoint that rocks the fragile peace.
RATINGS (Unchanged unless stated):
The cost of insuring against default on 5-year sovereign debt traded around 140 basis points in mid-July, down 30 points from the start of the year, but having added around 25 points since mid-March.
Following is a summary of key political risks to watch.
FRAGILE PEACE IN SHADOW OF THAKSIN
The flood started just after the general election passed peacefully, easing political tension, though there is no indication the new government can bridge the country's deep divisions after six years of turmoil.
In mid-July, the ruling party said it would push ahead with plans to change the constitution after a court ruled that proposed amendments - which Yingluck says are part of an effort at national reconciliation - did not threaten the monarchy, which meant Puea Thai escaped dissolution. Critics say the rewrite is aimed nullifying actions taken by the generals who in 2006 overthrew self-exiled former premier Thaksin Shinawatra, Yingluck's brother, to allow him to come home without serving jail time for abuse of power.
Though the court's decision essentially just delays the problem's resolution, it has eased some of the political tension that had been building.
Thaksin fled the country in 2006 after being deposed. He is now in self-imposed exile, avoiding prison on a corruption conviction he says was politically motivated.
The Puea Thai Party led by Yingluck, who is Thaksin's sister, swept to power last year. The margin of victory allayed fears about a disputed result that might have led to street protests or military intervention, but stability cannot be guaranteed as long as rivalry between pro- and anti-Thaksin camps remains entrenched.
A political conflict, broadly pitting the "red-shirts" from the urban and rural working classes against "yellow" royalists, the urban elite and the military top brass, shows no sign of resolution and tensions are starting to build over the prospect of Thaksin seeking to return home and resume his political career with his graft conviction whitewashed.
What to watch:
- Puea Thai's response to the court ruling. The party is now in a tight spot. The Constitutional Court recommended the government seek popular approval in the form of a referendum before it is allowed to rewrite the constitution, but with a plebiscite comes the risk of the amendment being shot down and Thaksin's graft conviction being upheld. If it presses ahead with a total rewrite, in defiance of the court, it would certainly face a backlash. Another option is to amend clauses of the charter separately, but that could be a very lengthy process, one for which Thaksin may not be prepared to wait.
- Public and investor satisfaction with the measures taken to rebuild after the floods. This is crucial to the government plan to boost foreign investment and raise living standards. If major flooding takes place later this year and the country is not prepared, it could seriously hurt the ruling party.
- The judiciary. Thailand's courts have delivered rulings that have dissolved political parties, banned hundreds of politicians and brought down governments, and the impartiality of judges is often questioned. Any rulings deemed politically motivated could trigger a new crisis. The Constitution Court, which Thaksin has accused of planning a "judicial coup" is due to reach a decision on whether moves to amend the constitution should be allowed. That could be a flashpoint.
- The PAD. The ultra-nationalist group has warned it will come out in force if it becomes clear Thaksin will return to Thailand without serving prison time. Though it may no longer be able to draw big crowds, it does have hardcore followers easily mobilised that can cause damage.
- Reconciliation plan. Four versions of a unity bill have been on parliament's agenda but have been put on hold until the next session in August. It is likely to focus on a general amnesty for all political offenders since 2005 and the annulment of all investigations by the now-defunct Assets Scrutiny Committee (ASC) set up to investigate alleged corruption by Thaksin and his cabinet. Both would put Thaksin in the clear and allow the return of $1.5 billion of his seized assets. The opposition, which has close links to Thailand's royalist establishment and military, is furious.
- The military. Thailand's generals have a long record of staging coups to remove or preserve governments, normally with full backing of the conservative elite, which is still a potent force behind the scenes. A coup would be extremely risky for the army given what could be a monumental backlash by the red shirts. However, any sign of a purge of the royalist top brass and promotion of pro-Thaksin military commanders in a reshuffle currently being discussed and due to take effect in October would make that scenario more likely. Yingluck is likely to maintain the uneasy status quo and try to appease the generals.
- Calls for reform of lese-majeste laws. In late May, a court handed an eight-month suspended jail sentence to a website editor for failing to quickly remove posts deemed offensive to the monarchy. The case that had added to a debate over Thailand's draconian royal censorship laws which is heating up by the week. A group of academics, called the Nitirat group, is calling for punishments to be softened and for Thai monarchs to take an oath to protect the constitution has been met by fierce criticism, republican slurs and even death threats. The government has distanced itself from the pro-reform group and says there will be no change to the law. Nitirat has also been linked to Thaksin, a charge it denies.
Yingluck's economic team was welcomed by foreign investors at first, but her government has had to tear up its calculations after the floods, which had a devastating impact on industry, with tens of thousands of jobs lost, mainly in the car and electronics sectors.
Thailand's economy grew a record 11.0 percent in the first quarter from the previous three months, rebounding from the floods, and strong full-year growth is expected due to a jump in consumption and investment after the disaster.
Despite external risks such as the euro zone debt crisis, the National Economic and Social Development Board stuck to its forecast of 5.5 to 6.5 percent economic growth this year.
The economy grew just 0.1 percent in 2011.
At its most recent policy meeting in June, the central bank left its main interest rate unchanged at 3 percent, as expected. It now seems likely to leave rates unchanged until the end of the year to help the recovery in light of the weakening global economic outlook.
What to watch:
- Central bank policy moves, and whether the GDP forecast proves accurate.