Strategy Note /
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Xi Jinping and key person risk in emerging markets

  • Rewriting historical interpretation paves way for Xi's retention of power in a third presidential term and beyond

  • Since 2012 68-year-old Xi has sidelined rivals, scrapped president term limits, enshrined his ideology, neutered tycoons

  • Xi is the prime example of 'key person risk' but there are other cases in EM: eg Bangladesh, India, Saudi and Turkey

Xi Jinping and key person risk in emerging markets
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

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Tellimer Research
12 November 2021
Published byTellimer Research

Xi Jinping key person risk in China

Xi Jinping is the prime example of 'key person risk' in emerging markets and this was reinforced by this week's meeting of the Chinese Communist Party Central Committee – a body made up of high-ranking leaders of the party, military and state-owned enterprises.

The resolution to reinterpret party history, following only those under Mao Zedong in 1945 and Deng Xiaoping in 1981, likely paves the way for Xi's third presidential term from 2022 to 2027 and the preservation of his power thereafter (whether he retains the formal 'paramount' leadership of the party, military and presidency, or not).

There are other cases in emerging markets where the rules of the game under which investors from the domestic private sector, foreign investors and foreign sovereigns engage have cemented under the rule of one leader.

There is similar key person risk in the investment cases of India (Modi), Russia (Putin) and Saudi Arabia (Muhammad bin Salman) in large EM and Bangladesh (Hasina), Egypt (Sisi), Pakistan (Imran) and Turkey (Erdogan) in small EM. We could include Ivory Coast (Ouattara), Rwanda (Kagame) and Uganda (Museveni) in the very, very small parts of EM.

Not included in the list of key person risk are Iran's Supreme Leader Khamenei (because of the role of Iran Revolutionary Guards Corps' leadership) and Morocco's King Mohamed VI (because of the role of the Makhzen).

However, in large parts of the EM universe (by number of countries if not importance in market capitalisation or benchmark index weights), across ASEAN, GCC, LatAm, and Sub Sahara Africa, key person risk has actually decreased in recent times.

Key person risk: Leaders' longevity in emerging markets

Other cases in emerging markets

Large EM

  • India: 71-year-old Prime Minister Narendra Modi has been leader since 2014. The BJP's dominance is in part due to the division (eg between parties that are strong at the state level and the largest opposition party, Congress, with a national support base) and lack of leadership in the opposition (eg Rahul Gandhi), but mainly because of the charismatic leadership of Modi.

    While there are others in the BJP leadership (eg Amit Shah) with the organisational skills needed for an election campaign, there is no other politician with the national electoral clout of Modi.

    Slower growth and the Covid crisis have led to a drop in his approval ratings (eg from a peak of 84% in May 2020 to 68% currently, according to Morning Consult), but he likely remains unrivalled prior to the May 2024 general election, even if there could be setbacks in the state elections along the way (eg Uttar Pradesh in February 2022).

  • Russia: 69-year-old President Vladimir Putin has been leader since 1999. While his approval rating has dropped (eg from the above 80% level between 2014 to 2018 to 67% currently, according to Levada Centre), his actions against dissidents and protestors demonstrate effective centralisation of power, and the constitutional change in 2020 creates a path to maintaining his grip on the Presidency until 2036.

    Constitutional reform means Putin is not required to step down in 2024 (an election for which he remains unrivalled) and can run again in 2030.

    Putin's de facto party, United Russia, remains in control of the federal legislature, the State Duma (with merely a drop from 75% of seats to 72% after the September 2021 election – 66% is needed for further constitutional reform).

  • Saudi Arabia: 36-year-old Crown Prince Muhammad bin Salman has successfully concentrated political power (change in the line of succession, with the removal of Muqrin and Nayef), domestic security control (the Ritz Carlton Affair, reform of the religious police), military and foreign policy (Yemen War, Iran policy) and economic policy control since the accession to the throne of his father, King Salman, in 2015.

    From an economic perspective, under his direction and the umbrella of his Vision 2030, capital market reform, the Aramco initial public listing, Public Investment Fund investments, social liberalisation to unleash the potential of the female workforce, the entertainment and tourist sectors, the massive Shareek investment program and new environmental pledges have been initiated.

    The centralisation of power that has enabled these seismic policy changes also creates a vulnerability in any succession scenario (eventual succession to the Crown Prince, rather than 85-year-old King Salman).

Small EM

  • Bangladesh: 74-year-old Prime Minister Sheikh Hasina has been leader since 2009 (after a previous stint from 2001 to 2006). Bangladesh has transitioned into a de facto one-party state and political economy under her Awami League, with longstanding allies in charge of the military (in the aftermath of the Bangladesh Rifles revolt in 2009), 75% control of parliament, an incapacitated opposition (the Bangladesh National Party, which never recovered from its failed 2015 blockade, and the Jamaat-e-Islami, which was formally outlawed in 2013), and all foreign sovereign contact (India, China, Korea) channelled through her government (China was previously more closely linked to the BNP).

    Hasina's political heir appears to be her son, 50-year-old Sajeeb Wazed Joy, who is an Awami League party member and an unelected advisor to the government on information and communication technology.

    However, it is not clear, should he ultimately succeed Hasina, if his relationship with the army chief (currently, SM Shafiuddin Ahmed, who assumed his three-year role in June 2021), will be as close as that between Hasina and former army chiefs, such as Aziz Ahmed.

  • Turkey: 67-year-old President Recep Erdogan has been leader since 2003 (first as prime minister). Since then, he has sidelined rivals within his own AK Parti (first Abdullah Gul and more recently, Ahmet Davutoglu), dismantled the rival Islamist Fethullah Gulen-led network in the bureaucracy and military (in an accelerated fashion after the attempted coup in 2016) and pushed through constitutional change from a parliamentary to an executive presidential political system (in 2017).

    His first 2014 to 2018 presidential term may not count towards the two-term limit because the transition to executive presidency was fully implemented afterwards, and, if this is the case, he could still stand for election in June 2023.

    Of course, behind Erdogan stands a set of aligned vested private sector commercial and senior military interests. With potential successors marginalised over the past decade, there is a high risk that an ultimate transition to a post-Erdogan era will be orderly, albeit it might be welcomed by foreign investors who have been exasperated by Erdogan's irrational interest rate policy.

Special cases in EM

Egypt and Pakistan have key person risk but only to an extent, because of the reliance of both leaders, as with any individual in their positions, on the support of enough of the military and intelligence deep-state that dominates the political systems of both countries.

  • Egypt: 66-year old President Abdel Fatah el-Sisi has been leader, effectively, since 2013 (first, after the removal of President Morsi after protests in 2013, when Sisi was army chief, and then after winning an uncompetitive presidential election in 2014, with 97% of the vote and 47% turnout).

    Sisi has no political party of his own (the Future of the Nation Party, which has 53% of seats in parliament, although this figure may be higher given that some MPs have not officially pledged allegiance for fear of losing their seats by switching parties, is an amalgam of established politicians and likely more loyal to Military Intelligence than to Sisi himself).

    Sisi relies on the support of different factions within the military and intelligence deep-state (institutionalised in three bodies, Military Intelligence, General Intelligence and the National Security Agency), or at least the primacy of the faction to which he is closest (Military Intelligence).

  • Pakistan: 69-year-old Prime Minister Imran Khan has been leader since 2018. Unlike Sisi in Egypt, Khan has built a national political party from scratch, via organic campaigning and defections from established politicians, over more than two decades.

    Similar to Sisi, he is reliant on support from enough of the military and intelligence deep state (which extends to more than solely army chief Qamar Javed Bajwa, whose tenure started in 2016 and should run until at least the end of 2022).

    Khan faces an electoral challenge by October 2023 and government approval ratings have fallen, unsurprising given the Covid crisis, accelerating inflation and austerity measures (eg from 51% in December 2018, to a trough of 32% in February 2020, before recovering to 48% in September 2021, according to Gallup Pakistan). However, opposition parties do not appear any more coherently led or united than they were prior to the July 2018 election.

    Khan has also likely demonstrated sufficient willingness to support the deep-state on the policy areas that it cares most about (domestic security, defence expenditure, foreign policy) to retain its support. He still represents key person risk because it is not clear that there is another politician within his own Pakistan Tehreek-e-Insaf party who could keep the party united in his absence or another politician across all the parties with both charismatic popular appeal and the trust of the deep state to operate as a junior partner in government.

But in much of EM key person risk has decreased

This is not to say that politics does not matter for investors in developed markets – evidenced by the rise of Trumpism in the US and the far-right populists in the UK (Brexit) and Europe (eg France, Italy, the Netherlands, Hungary and Poland).

But political risk does not tend to be so clearly attached to an individual, compared with the situation in many emerging markets, irrespective of the political system.

Indeed, the improving structural investment case of many parts of EM is precisely that political risk is no longer so concentrated in a single leader.

  • ASEAN: The large-population democratic republics in ASEAN – Indonesia, Malaysia (post-Mahathir) and the Philippines – have moved on from key person risk, Singapore less so.

    The Philippines is a highly concentrated presidential system, but there is a single term limit and one of the features of the hotly contested 2022 election is that there is no disagreement over economic policy.

    At the other end of the spectrum, Vietnam, the country with the most similar system to China, is not reliant solely on party leader Trong, and the election of President Phuc in April 2021 marked an important generational handover.

    The military-dominated government in Thailand is dependent on the senior officers who supported the 2014 coup, not Prayut Chan-o-cha alone, and its de facto mutual support pact with the monarchy.

  • GCC: The monarchies of the GCC have managed succession in recent years in a less disruptive manner than feared – Oman (Qaboos to Haitham in 2020), Kuwait (Sabah to Nawaf in 2020), Qatar (Hamad to Tamim in 2013) and Saudi Arabia (Abdullah to Salman in 2015).

    Key person risk, in the case of Saudi Arabia alone, has probably increased, as discussed above.

  • LatAm: A generation ago, the transition from dictatorships to democratic republics in LatAm saw the erosion of key person risk.

    Current politics is often a battle between the support bases of the left or right and these two camps tend to consolidate around two figures, because of second-round presidential voting systems, eg Lula and Bolsonaro in Brazil. But this is not the same as key person risk.

    Furthermore, the need for the support of an often fragmented legislature further dilutes the importance of the holder of the presidential office. Political risk is a major factor in LatAm but this does not centre on the health or retention of power of a sole long-standing leader.

  • Sub-Saharan Africa: The largest republics of SSA have much less key person risk compared with a generation ago, driven by the fragmentation of the former one-party states in countries, eg post-Mandela ANC in South Africa, the PDP in Nigeria and KANU in Kenya.

    The remaining 'strongmen of Africa' increasingly look like the exceptions, eg Museveni in Uganda, Kagame in Rwanda and Ouattara in Ivory Coast, rather than the rule (eg following the exits of Angola's dos Santos, Burkina Faso's Compaore, DR Congo's Kabila, Gambia's Jammeh, al-Bashir in Sudan and Mugabe in Zimbabwe).