On Monday, the Constitution Court annulled the general election held on April 2, ruling that the Election Commission had violated the constitution. Protests against corruption in government resulted in Thaksin stepping down as prime minister after his Thai Rak Thai party overwhelmingly won the election, which opposition parties boycotted.

Since January 2004, a Muslim insurgency rooted in the country's three southernmost provinces of Narathiwat, Pattani and Yala has not only intensified its hit-and-run assaults, but more recently has upgraded its tactical capabilities, including the increased use of improvised explosive devices.

The conflict has been long underestimated by Bangkok's authorities, who have grappled futilely for ways to combat the shadowy insurgency. The government's misadministration in such areas has contributed to Thai Muslim resentment, and allegations of torture and abuse by authorities have indirectly boosted popular support for militant groups' activities.

A feared expansion of insurgent activities from the three provinces further up the coast into other regions with large minority Muslim populations, including Phuket and Krabi provinces, could have a severe impact on one of the brightest spots in the economy: tourism. Tourist arrivals are up a whopping 21.7% in the first quarter of this year.

Bombings on Indonesia's resort island of Bali, where hundreds of foreign tourists were targeted and killed, show how isolated incidents of terror can quickly reverse the fortunes of the entire hospitality businesses. After recovering strongly from the December 2004 tsunami, which killed more than 2,600 foreign tourists, the last thing Thailand's tourism industry can afford is a terror attack orchestrated by opportunistic Muslim militants.

That said, Thaksin's recent political problems have distracted Bangkok and impeded its ability to implement a more effective counter-insurgency strategy. The recent Constitutional Court annulment of the snap April 2 polls means Thailand probably will not have a new functioning government until early August.

For all his recent political troubles, Thaksin and his Thai Rak Thai party are still expected to win another large majority - underscoring the opposition's enduring inability to present itself as a viable alternative.

The political vacuum, along with spiking global oil prices, is sucking the life out of both consumer and business confidence. The main consumer confidence index fell to a four-year low in April, coinciding directly with the heightened political tensions. Industrial production, while still growing, fell off from 12% year-on-year growth in February to 8.2% in March.

Overall export figures are up, growing a robust 17.9% in the first quarter with particularly strong performance in the US and China. Still, China's rise as a low-cost leader in low-end manufactures is doggedly chipping away at the competitiveness of many Thai industries, increasingly in the critical electronics sector.

Thailand recently signed a free-trade agreement with China, but Bangkok needs to land upon other innovative ways quickly to promote more bilateral trade and investment to ensure that Beijing presents more of an opportunity than threat to Thai business.

And hopes that the Association of Southeast Asian Nations (ASEAN), of which Thailand is a key founding member, will be able to forge a cohesive economic bloc to compete with China's massive integrated market still seem far-fetched.

Economics good, politics bad
Barring political and security turbulence, Thailand's economic fundamentals are still in the main appealing. Economic growth has recently decelerated, with gross domestic product (GDP) growth dipping from more than 6% in 2004 to about 4% last year.

Interim policymakers need to find ways to convince local business leaders that previously promised growth-promoting policies, including massive state spending plans on new infrastructure projects, are indeed still in the pipeline. If not, declining business confidence could shave more than a full percentage point off this year's GDP growth, from more than 5% to less than 4%.

Indications are that foreign investors, considering an increasingly skilled workforce and improving infrastructure, still want to look on Thailand's bright side. The local currency, the baht, has surprisingly strengthened during the recent political fiasco, due partially to the lower interest rates on offer in neighboring Malaysia and Singapore. The Thai stock market surprisingly surged after the Constitution Court announced its decision to annul election results.

Still, there are lingering concerns that a newly elected government, which will be charged primarily with overseeing political and constitutional reforms, will lack the mandate to implement long-term economic policies.That's bad news, because the investment horizon is already dimming. New business venture applications were down 52% year on year in the first quarter of 2005, according to the government-run Board of Investment (BOI).

Now a combination of rising interest rates, an appreciating baht and political instability threatens to discourage new investments from the private sector further, according to caretaker Finance Minister Thanong Bidaya. The private investment index decelerated in line with political tensions to 1.4% year on year, down notably from 5.3% in February.

Most foreign investors have adopted a wait-and-see posture in response to recent political wrangling. Still, some big Western investors are looking for opportunity in crisis.

France, the third-largest European investor in Thailand after the United Kingdom and Germany, has moved aggressively to enhance trade relations, particularly in the transport sector, during the recent political hiccup. President Jacques Chirac had his eye on landing infrastructure-related contracts for French firms during his February 18 visit to Bangkok. China is also ramping up new Thailand-based ventures, heedless of the deteriorating political environment.

That's certainly not the market consensus, however. The coming months will be crucial for Bangkok to restore confidence and bounce back from its institutional and political crises. Even with the recent judicial intervention and a plan to hold new elections, uncertainty will be the dominant theme in Thailand for the rest of 2006.