Country Risk: What Happens When A President Dies?
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?
The following are examples of a few government leaders who died suddenly while still in office:
- 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.
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.)
- 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 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.)
- 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.
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.)