Eser, who played a key role in transforming Legal & General Investment Management (LGIM) from its UK roots into a $1.3 trillion global asset manager, started by saying that he was happy to be in Cape Town this week, rather than in London. However, he went on to make the point that South Africa and other emerging markets are very familiar with acts of fiscal indiscipline being quickly punished by the markets.
Eser is not alone in thinking the days of the new government of UK Prime Minister Liz Truss and Chancellor Kwasi Kwarteng are numbered, thanks to the market’s dramatic response to what has been called a totally reckless ‘mini- Budget’ on Friday. Kwarteng’s “breezy” speech detailed what was effectively the biggest fiscal intervention by a British Chancellor in 50 years.
What has been described as “incredibly negligent” and a “kamikaze budget” outlined policy that would maintain existing government spending levels, cut taxes and boost the fiscal deficit. “All in the face of rising inflation!” remarked an incredulous Eser.
Noting that to understand what was happening now you need to take a longer view, all the while taking into account the current context, Eser unpacked some important stats for the last 15 years since the Global Economic Crisis of 2007 (the UK economy hasn’t grown in dollar terms, debt-to-GDP has ballooned), but made the point that “we are living in a different world now with inflation and interest rates rising … the things you could get away with during the last crisis (when rates were low) just won’t fly now”.
Describing Kwarteng’s policy statement as “playing with fire”, he said the markets were just not in the mood to allow it, which is why the currency was in a tailspin and gilts had spiked. The fallout has been speedy and severe, and threatens the stability of the UK pensions and mortgage markets.
Eser gave the example that 40% of UK mortgage products were withdrawn from the market overnight. To which Avery responded that surely this “sugar-rush intervention” would lead to a bigger crash on the other side.
Eser noted that in South Africa we have lived by a certain set of rules (aka the normal functioning of the market) for a long time; the developed markets haven’t. The UK government has a choice now to double down or pull back from this disastrous business and show fiscal discipline.
Eser is not alone in fearing they will double-down on this policy. As the Guardian newspaper said this week in an editorial: “Ms Truss and Mr Kwarteng give every impression of not caring. They seem to think they are clever and other people are stupid.”
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