WHETHER Thailand's government stands or falls, the country's latest bout of political chaos has further damaged one of its most precious economic commodities - its image as a stable place to do business.

The power struggle between supporters of deposed Prime Minister Thaksin Shinawatra and his royalist-backed opponents will continue to polarise Thailand whatever the immediate outcome of the standoff, analysts say. The country has been tumbling in most political risk rankings since the crisis began in 2005.

While Thailand's political problems are nothing new, analysts say the storming and shutting down of Bangkok's international airport by anti-government protesters represents an escalation that is particularly damaging to Thailand's image and will have long-term implications for investment and tourism.

With several countries telling their citizens to stay away, and flights in and out of Bangkok paralysed, a nation long seen as a safe and business-friendly 'Land of Smiles' is increasingly being viewed as one of Southeast Asia's basket cases.

'Perception is hugely important,' said Mr Robert Broadfoot, managing director of the Political and Economic Risk Consultancy (PERC) in Hong Kong.

'Where companies put their money is based on perception. The changing perception of Thailand is going to make it a lot harder for the country to attract investment.'

The tourist industry, which accounts for 6-7 per cent of Thailand's GDP, will be the most immediate casualty, analysts say. December and January are Thailand's tourism high season.'

'If you have protesters bursting into the airport, of course it's going to be damaging for the economy. It's hardly the best way to promote your tourism industry,' said Mr Chris Bruton, Thailand director for corporate advisory company Dataconsult.

'But it's not the people stranded in the airport who are the big problem in terms of their view of Thailand. It's the people who now won't come in December or January for their holidays. It's the business people who will be cancelling meetings and deciding against investment projects here.

OUTLOOK WORSENING

Tourism-related shares tumbled on Thailand's stock exchange on Wednesday, and the benchmark index hit a five-year low.

But analysts say the stock market downside will be limited by the fact that foreign portfolio investors have already largely pulled their funds out of Thailand - due partly to political uncertainty but mainly because of a general flight from emerging-market risk caused by the global financial crisis.

Foreigners have about 90 billion baht (S$3.85 billion) invested in Thai equities, down from 238 billion baht at end-2007.

Ms Usara Wilaipich, senior economist at Standard Chartered Bank in Bangkok, said the immediate macro-economic impact of the crisis would also be contained, and saw no risk of capital controls.

She said even in a worst-case scenario where foreigners pull the rest of their equity investment out of Thailand and the country loses US$2.5 billion in tourism revenues, this would still only be equivalent to 5 per cent of Thailand's foreign reserves.

Analysts say the more worrying impact of political turbulence will be that foreign direct investment - already shrinking as the world's economy falters - will increasingly go to competing countries now regarded as less politically risky.

Broadfoot said that of 16 countries tracked by PERC, Thailand had dropped several places over the past three years and was now 15th in terms of political stability, with only India below it.

'The two countries that have seen the most severe worsening in terms of political risk are Thailand and Malaysia,' he said.

The World Bank's Worldwide Governance Indicators, a comprehensive annual ranking of countries according to various measures of governance, rated Thailand's political stability at only 16.8 out of 100 in 2007, diving from 44.7 in 2003.

The rating meant Thailand was seen among the bottom 20 percent of countries in terms of political stability, well below regional peers like Vietnam (rated 56.3) and Malaysia (52.4), and dropping towards Indonesia (14.9) and the Philippines (10.1).

Thailand has also fallen sharply in the World Economic Forum's ranking of countries according to global competitiveness.

This week's events have dragged Thailand's attractiveness to foreign investors even lower, risk analysts say.

'Political risk ratings will worsen,' Bruton said. 'Around the board table, when investment decisions are being taken, people are going to be more reluctant to invest in Thailand.'

Thailand's 5-year credit default swaps (CDS) - contracts that protect against defaults and restructuring - moved out by 15 basis points (bps) to 285/315 bps after the airport was occupied, implying an uptick in risk.

That means it would cost US$285,000 to US$315,000 to insure against US$10 million of Thai sovereign debt. The spreads are below the recent high of 530 bps struck in late-October, but the trend over the past year shows markets view risk as rising.

And analysts say the outlook is also negative, because regardless of the fate of the current administration, the country's fundamental political problems will persist.

'The government is clearly going to fall or be removed, it's just a matter of timing,' Broadfoot said.

'But that will not resolve the situation. There is a worsening urban-rural divide, key institutions are being weakened, and this is a structural problem that won't be resolved by a change of government.' -- REUTERS