THAILAND'S country risk profile is worsening despite a temporary respite in protests that shut down Bangkok's airports, because no solution is in sight to the fundamental power struggle undermining the country's stability.

The royalist anti-government People's Alliance for Democracy (PAD) has pledged to end its street protests and crippling airport sieges following a court ruling that disbanded the governing political party, backed by exiled former Prime Minister Thaksin Shinawatra, for electoral fraud.

But the court's decision was long expected and Thaksin's allies had already prepared a new 'shell' party which can take over power and vote for a new prime minister. The struggle between the pro-Thaksin 'red shirts', with their strong rural support, and the mainly urban 'yellow shirts' of PAD goes on.

'The anti-Thaksin forces have won a battle but the larger conflict is far from over,' said Mr Chris McKee, head of the US-based International Country Risk Guide.

'Ultimately, the problem with Thailand ... is that there is a class divide, largely between urban (bureaucratic elite and middle class) and rural elements of society, that appears irreconcilable for the moment,' he said.

Eurasia Group analyst David Kiu also said the court ruling had done nothing to resolve Thailand's destructive divisions.

'New elections are now more likely, but the fundamental conflict between allies and supporters of ... Thaksin and the Bangkok middle class and elite remains intact,' he said.

Analysts said that although the court's decision had provided a face-saving way to end the airport blockade and the immediate political crisis - which was having a serious impact on the economy - in the long run it just meant further instability.

'Cycle of instability'
IHS Global Insight analyst Kristina Kazmi said new elections were not a solution - pro-Thaksin groups would be likely to again win a majority thanks to their widespread rural support, anti-Thaksin elites would relaunch protests, and the 'cycle of instability' that has trapped Thailand would continue.

'Thailand remains locked in this structurally flawed system for the foreseeable future,' she said, announcing a new downgrade of IHS Global Insight's Thai political and security risk ratings.

'The risk of civil unrest is growing, and with it, the accompanying risk of military intervention.'

Thailand has been tumbling in political risk rankings since 2005 when the PAD launched its campaign to oust Thaksin.

The World Bank's Worldwide Governance Indicators, an annual ranking of countries, rated Thailand's political stability at only 16.8 out of 100 in 2007, a severe decline from 44.7 in 2003.

And as Thailand's stability declines relative to regional peers, it loses investment share to them. Thailand's benchmark stock index is down 44.3 percent since PAD's protests began three years ago. By contrast, Jakarta's stock market is up 13.6 per cent over the same period. Malaysia is down 7.9 per cent.

Analysts say that while Thai politics has always been relatively chaotic, with governments and coalitions changing frequently and 18 coups or attempted coups in 76 years of on-off democracy, the basic functioning of government and key institutions had remained relatively sound for decades.

While the World Bank assessment of political stability has tumbled, its rating of Thai government effectiveness only declined slightly to 2007. But risk analysts say this year has seen a collapse in the government's ability to govern.

'To all intents and purposes, Thailand does not have a functioning government,' Ms Kazmi said.

Portfolio and foreign direct investors had long been confident of a stable and business-friendly environment whatever the state of political machinations. That has now changed.

Three years of growing turmoil have led many investors to fundamentally rethink their views of the riskiness of Thailand, analysts say. The airport blockade was the starkest example yet of how Thailand's political conflict is inflicting serious damage on the economy, and the outlook is for worsening risk. -- THOMSON REUTERS