Anatomy of a coup: Social and governance red flags common in vulnerable countries
Political Risk Outlook 2022
by Eric Humphery-Smith and Maja Bovcon,
Six successful coups in the space of 11 months is highly unusual, but that is just what we saw between February 2021 and January 2022. This worrying trend elicits key questions. First and foremost is where might be next?
Our predictive State Instability Index provides a good starting point. Virtually every country that has experienced a successful putsch in the last five years featured in the top 40 of the index, which assesses the risk of a major destabilising event over the next 12 months, including a coup, a civil war, or genocide. The latest edition reveals that Africa currently accounts for 50% of the highest risk countries, followed by Asia with 30%.
However, to distinguish between destabilising events and to narrow the focus down to coups specifically, we’ve combined the State Instability Index with insight gathered from a selected range of our Social and Governance risk indices, together with qualitative analysis from our experts. In doing so, we’ve isolated a group of countries that share a set of characteristics that are predominantly present where military takeovers occur. Coups are, in general, rare events, so it’s important to stress that we’re not saying one will happen. But based on the structural factors we’ve identified, Bolivia, Côte d’Ivoire, Gabon, Guinea, Iraq, Kyrgyzstan, Madagascar and Zimbabwe are among the most vulnerable, although mitigating factors will likely prevent a coup in some of them.
Aside from the ‘where next’, there are two crucial aspects of military takeovers that are also worth exploring. Why do they happen? And importantly for investors, what happens once they occur? Perhaps unsurprisingly, our data shows that the investment landscape rarely, if ever, improves after a coup. In fact, it often gets worse: almost half of all coups since 2000 were repeats – one coup .
African region three times as likely to host the next coup
Burkina Faso and Guinea-Bissau are just the latest in a growing list of African countries that have witnessed a coup attempt in the last five years. Since the turn of the century, there has been on average a 1% probability that a coup will occur in any given country in a year. In Africa, however, this rate triples to over 3% (see Figure 1).
Our Social and Governance risk indices reveal how high levels of poverty and unemployment, weak institutions, insecurity and strained public finances make governments more prone to experiencing a coup and less able to counter the instigators. Figure 2 shows that coup-affected countries face greater social and governance risks. In a set of indices that includes Government Stability, Freedom of Opinion and Expression, Democratic Governance and Corruption, the difference in average score between countries that have experienced a coup and those that haven’t is highly significant. On our 0.00–10.00 risk scale, coup countries perform worse than their non-coup counterparts on each index. This gap in performance indicates the far higher average coup risk of countries in Africa and Asia, which also generally inhabit the worst-performing end of our State Instability Index.
The countries most vulnerable to a coup in 2022
Based on both our State Instability Index and our social and governance indices, a number of countries share similar structural vulnerabilities to those that have experienced a coup. This includes Bolivia, Côte d’Ivoire, Gabon, Guinea, Iraq, Kyrgyzstan, Madagascar and Zimbabwe (see Figure 3), each a nation with a rich history of coup attempts, or where an ageing autocrat allows factionalism to flourish.
Gabon, which saw a failed coup in January 2019, is a prime example. The Bongo family dynasty is clinging to power amid opposition from within the ruling party against President Ali Bongo’s heir apparent, Noureddin Bongo Valentin. In Zimbabwe, factionalism within the ruling ZANU-PF remains rife and poses a permanent threat to government stability. President Emmerson Mnangagwa de facto recognised this when he gave a prominent role to the military in his government to mitigate the risk of an overthrow.
The dynamics behind a successful coup are never simple though. Mitigating factors, including geopolitics, can play a role in offsetting the chances of a military takeover for some jurisdictions. For instance, despite a high-risk environment in Kyrgyzstan, the chance of a successful coup decreases due to significant security and economic support from its regional superpower Russia. We saw something similar in neighbouring Kazakhstan, where the Collective Security Treaty Organization – the Russian-led regional security bloc – was quick to intervene when it looked as though President Tokayev’s regime was ripe to be overrun in early 2022. French military presence also reduces the likelihood of a coup in Côte d’Ivoire, even though the country would otherwise provide fertile ground for a takeover, due to its rich history of coup attempts and the fact that President Ouattara is serving a contentious third term.
Coups worsen operating and investment landscapes
Increasingly stringent ESG targets mean that countries that experience a coup face restricted access to international finance and are more likely than their peers to fall into a vicious cycle of instability and depressed economic development. Coup leaders often justify their seizure of power by pointing to the poor governance record of the overthrown regime. They also pledge to uphold democracy, but the hierarchical nature of the military – which does not tolerate dissent – makes this impossible. Indeed, performance on our social and governance indices more often than not deteriorates after a coup.
In Guinea, Mamady Doumbouya, the head of the special forces that deposed President Alpha Condé on 5 September 2021, denounced the Condé administration’s bad governance, corruption, and disregard for democratic principles. But in the months that followed, Doumbouya failed to live up to his promises, making no serious attempts to reform government or investigate allegations of corruption, much less commit to elections and a civilian transition within a quick timeframe. Indeed, we have seen virtually no improvement on our corresponding indices in the months following the coup.
In Sudan, General Abdel Fattah al-Burhan’s military regime has stepped up the crackdown on pro-democracy movements, antagonising protestors. This chain reaction is reflected in the country’s scores on our Civil Unrest and Freedom of Opinion and Expression indices, both of which deteriorated following the coup.
Operational disruption and sanctions following a coup depress state revenues. We see this deterioration on our Public Debt and Fiscal Debt indices, prolonging sovereign default risks. In coup-affected countries, political and regulatory uncertainty also increase.
One silver lining for investors is that coup leaders do not generally have an increased appetite for resource nationalism. Scores on our Resource Nationalism Index one quarter before and after the coup remain on average unchanged, showing that coup leaders are aware of the need to reassure operators so that revenues continue to flow into state coffers.
Paying attention to the signals
Our data show that there are usually red flags well before coups occur. Treating these events as scenarios that can be anticipated and planned for is the best means to reduce the element of surprise. Savvy corporates and portfolio managers can employ predictive models and monitor the exposure of portfolios to S and G risks to develop robust mitigation strategies. However, as shown by our analysis, the complex and fast-moving signals that precede a coup still require detailed examination to find trigger points and connect the dots.
As the confluence of the global economic slowdown, inflationary pressures, and food shortages ignites popular dissatisfaction across the globe, it also increases the risk of governments succumbing to overzealous military leaders over the next year. Reading the signs now is more important than ever.