At the heart of the matter is country risk - the risk that individuals and businesses face when investing in a country. Analyzing country risk involves examining the threat of a changing business environment, of changing government regulations and of changing leadership. It must also take into account the stability of the population and the overall government, as the threat of civil war and property destruction.
TUTORIAL: Economic Basics: Introduction

Five key factors determine the extent to which economies and financial markets will be affected by the death of a country's leader.

  • Succession Plan: Is there a leader-in-waiting or an upcoming election?
  • Stability: How long was leader in charge? Was the government and economy stable, and for how long?
  • Political System: How did the leader come into power (democracy, coup d'etat, inherited position)?
  • Cui Bono: Would destabilization give a particular group of people wealth and power?
  • Resources: Is the country resource rich? Are resources controlled by state-run interests, by oligarchs or by a small number of investors?

Many investors, including foreign governments and corporations, believe that highly centralized governments provide a level of stability to their economies. This belief rests in the idea that dictators or autocrats are ultimately interested in self-preservation, and investors looking to profit should take care of the interests of the dictator. Though investors may profit, dictatorships and governments with highly centralized power can lead their economies into ruin. (For more, see How Governments Influence Markets.)

The following are examples of a few government leaders who died suddenly while still in office:

Anwar Sadat

  • Succession Plan: Power handed down.
  • Stability: Economy and government unstable after years of war.
  • Political System: Previous leader came into power through a coup - not elected.
  • Cui Bono: The military and government employees ate up most of Egypt's GDP. Businesses controlled by oligarchs or the state.
  • Resources: Unlike its neighbors, Egypt wasn't rich in oil. Its industries tended to be focused on agriculture.

Anwar Sadat became the president of Egypt in October, 1970, following the death of Gamal Nasser. Nasser had been president for 14 years, and (along with Sadat) helped run Egypt after the British had left the country. He had come to power through a coup d'etat that overthrew the Egyptian monarchy.

Sadat had anticipated a substantial economic boost from trade and development following the Six-Day War of 1967, and began an economic policy aimed at bringing in private investors. However, the years of "Arab Socialism" under Nasser heavily involved the state in manufacturing and industry, but low productivity and inefficiencies sapped profitability. Price controls and subsidies continued by Sadat distorted the economy and increased the income gap, and military expenditures consumed a large portion of GDP. Additionally, the peace treaty with Israel resulted in Egypt being boycotted by other Arab countries, essentially torpedoing the public's hopes of the treaty resulting in an improved economy.

Sadat was assassinated in October, 1981. His successor, Hosni Mubarak, continued many of his policies, though Egypt ultimately came to be seen as more friendly to investors than some of its neighbors; however, inequalities ultimately resulted in his ouster during the 2011 Arab Spring. (For related reading, see Why Country Funds Are So Risky.)

Umaru Yar'Adua

  • Succession Plan: Won a heavily disputed election.
  • Stability: Government previously dominated by dictators and strongmen.
  • Political System: Previous president was popularly elected, though election came after five years of dictatorship.
  • Cui Bono: Oligarchs and politicians who receive rents and kickbacks did not want the status quo to be disrupted.
  • Resources: The country is rich in oil.

Umaru Yar'Adua became president of Nigeria in 2007, in an election contested by opposition candidates and criticized by international observers, stoking fears that the result would lead to strife between the oil rich southern states and the underdeveloped north. Nigeria was the 11th largest oil producer in 2007, and its economy depended heavily on income from multinationals developing its oil fields. Resource wealth was controlled by military leaders and politicians, resulting in a system considered to be corrupt. Looking to instill confidence from both domestic and international groups, Yar'Adua went about modernizing a political and economic system long considered to be rife with corruption. (For related reading, see How Does Crude Oil Affect Gas Prices?)

Umaru Yar'Adua suddenly left Nigeria for Saudi Arabia, after being in office less than two years, ostensibly for medical treatment. Before leaving, he did not formally place Vice-President Goodluck Jonathan in control of the government, essentially creating a power vacuum without any clear succession plan. The political confusion made international investors skittish, as Nigeria had only recently emerged from years of military rule. Rebels in the oil-rich Niger Delta terrorized oil companies, disrupting oil production and sending GDP from $207 billion in 2008 to $173 billion (Yar'Adua) in 2009. It wasn't until February, 2010 that power was officially handed to his vice-president. (For related reading, see Meet OPEC, Manager Of Oil Wealth.)

Franklin Roosevelt

  • Succession Plan: Vice-president took over office upon his death. Leader had been in office for more than a decade.
  • Stability: Country was at war, but was winning. Economy rapidly growing.
  • Political System: Democratically elected government.
  • Cui Bono: One particular group did not benefit substantially from leader's death.
  • Resources: Diversified economy.

Despite presiding over a country with more than 150 years of democratically elected presidents, Franklin Roosevelt did take over at a time of great economic distress: the Great Depression. The world economy was in ruins; the unemployment rate had led to millions of Americans being out of work, and the banking system was paralyzed by the stock market crash of 1929. (For related reading, see What Caused The Great Depression?)

Contrary to the two-term tradition followed by previous presidents, Roosevelt sought and won a third term in office; however, his failing health was a major liability. While many politicians did mull over the possibility of Roosevelt's death while still in office, it was agreed that it would not be in the best interests of a rebounding economy, or of the nation as a whole (the U.S. was fighting in World War II). Thanks to government projects and war spending, the U.S. had risen from $56.4 (1933) to $219.8 billion (1944).

Franklin Roosevelt died in April, 1945, less than a year into his fourth term as president. Despite the death of such a long-serving leader, the American economy continued to grow on the back of productivity increases and a post-war world economy.

The Bottom Line
The more intertwined an economy is with the health and welfare of a particular leader, the greater the country risk. However, it is important to note that the risk posed by a sudden vacancy in leadership does not mean that it is guaranteed to collapse, or that it won't improve under new leadership. (For related reading, see If These Famous World Leaders Were In Finance.)

Related Articles
  1. Investing

    5 Reasons to Rethink Retirement Investing

    Wherever you fall on a retirement crisis, consider these 5 reasons to rethink your investing strategy.
  2. Economics

    What Is Fiscal Policy?

    Learn how governments adjust taxes and spending to moderate the economy.
  3. Mutual Funds & ETFs

    The Top ETFs For a Fast Recovery After a Recession

    Recession and recovery cycles are imminent in the markets. Here are the ETFs, which provide the best performance for a fast recovery after a recession.
  4. Insurance

    Medicare 101: Do You Need All 4 Parts?

    Medicare is the United States’ health insurance program for those over age 65. Medicare has four parts, but you might not need them all.
  5. Economics

    Long-Term Investing Impact of the Paris Attacks

    We share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
  6. Stock Analysis

    An Introduction To The Indian Stock Market

    Most trading in the Indian stock market occurs through its two exchanges – the Bombay Stock Exchange and the National Stock Exchange.
  7. Savings

    How Americans Can Open a Bank Account In Thailand

    Have your paperwork in order and be sure to shop around.
  8. Economics

    Understanding Donald Trump's Stance on China

    Find out why China bothers Donald Trump so much, and why the 2016 Republican presidential candidate argues for a return to protectionist trade policies.
  9. Economics

    Will Putin Ever Leave Office?

    Find out when, or if, Russian President Vladimir Putin will ever relinquish control over the Russian government, and whether it matters.
  10. Forex Fundamentals

    How to Buy Chinese Yuan

    Discover the different options that are available to investors who want to obtain exposure to the Chinese yuan, including ETFs and ETNs.
  1. Is Nigeria a developed country?

    Nigeria is not a developed country by any reasonable standard. The country's per capita gross domestic product (GDP) is much ... Read Full Answer >>
  2. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  3. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  4. Do mutual funds have CUSIP numbers?

    The Committee on Uniform Securities Identification Procedures (CUSIP) number is a standardized identification system used ... Read Full Answer >>
  5. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  6. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  2. Bullish Engulfing Pattern

    A chart pattern that forms when a small black candlestick is followed by a large white candlestick that completely eclipses ...
  3. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  4. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
Trading Center