Kevin Kigima Ng'ang'a

Kevin Kigima Ng'ang'a

29-09-2022

08:29

OK, I have been accused by my seniors of using complicated jargon... So here is a thread (will try and simplify) on what is going on in the UK and why Britain is in trouble... Thread 🇬🇧 1/n

2/n So essentially, the UK has a new prime Minister after Boris left... Last week her new administration presented a mini-budget (essentially similar to what we have in KE as supplementary budget). The biggest issues facing the UK include inflation (at 40year highs),

3/n Significant increases in energy costs (UK imports most if not all its energy needs), a widening Current account deficit (meaning essentially imports completely overrunning exports). Now the politics: the new PM (Liz Truss) went against the former "Treasury CS" (Rishi Sunak)

4/n Lizz Truss campaigned on a platform of Tax cuts, getting a firmer Brexit deal, essentially a pro wealthy messaging (86,000 Conservative members decide the PM so it is easy to target the audience) whereas Rishi said UK needs to deal inflation as the most important immediate

4/n Issue. So she won and presented her plans to parliament Now to the issue and will draw local parallels to Kenya economy so that its easier to understand the mess. 1. The budget included energy cost guarantees. This is essentially like Gava saying on your KPLC bill you will

5/n a rebate of say 250/ per month for any household that their bill is say 10000 and above 2. Tax cuts. She basically reduced PAYE for the chaps of 30% tax bracket (the top 1%). She also proposed corporate tax drops among other cuts Now to the problem.

6/n In her budget proposal, the "Treasury CS" never indicated how all these cuts will be funded (they totalled about £160b over next two years). He said, "relaxxx mbona munapanic I will tell you in November chill" essentially he was on vibes and Inshallah.

7/n Obviously in my view it was rushed and not well thought through, why? 1. These plans would mean more borrowing or printing cash because there's no where else this can be funded from. 2. The Bank of England (CBK equivalent) had just the previous day raised interest rates

8/n Essentially the exact opposite. The markets called his BS & sold the GBP and Bond Market went crazy on Friday evening. To make matters worse, the Treasury CS on Sunday night on BBC said expect more tax cuts! Guys, were like, Nah Bruh C'mon! Straight to the door they went

9/n The biggest issue though that I picked up here is the government was lacking credibility essentially some players think UK does not have the fiscal discipline to manage its debt which is very very worrying. How can you make tax cuts in this economic conditions where inflation

10/n is at 11+%? Credibility these sides is like gold dust. You lose it, you lose your shirt. That is Episode1. Ep 2 coming up to be continued

Episode 2. 11/n So its Monday, everyone has rushed to the door selling their pounds. Obviously the clown show now is under global scrutiny and at this point the GBP has depreciated to lows since like 1983... Its a hot mess everywhere...

12/n So something else is meanwhile happening in what you call the Bond Markets (UK Bonds are called Gilts) because of the ndrama... I mentioned earlier credibility is gold dust in these markets...because the door is too small... People start trying to go through the window

13/n The window in this case is selling Bonds as well... Thing about Bonds is when you sell, its price goes down and something called yield goes up... The yield is typically what you are willing to earn (higher interest) because of a lower price.

14/n Now to the next problem... 1. Bonds are most held by Pension Funds, Housing Funds because of their long tenor (20y+). So what some of these pension funds do is as follows, the buy the bonds, place them with banks as security and unlock cash to lend to mortgage buyers or

15/n Buy more bonds depending on market conditions. Now thing is the if the value (price of the bond) goes down (because Maina, Kiptoo, Omondi, are trying to sell and get out through the window) the bank that is holding this security calls the pension fund to increase the value

16/n of the security in what is called a Margin call. As at Tuesday it is estimated that £1 Trillion was at risk in Leveraged positions... Now this problem needs more than a crusade... The thing is, there was no comment from the UK "Treasury CS" to calm the markets

17/n So something called a "Run Dynamic" happened where the BOE runs scenarios essentially to see worst case set up of what can happen and what they need to do to avert Financial Apocalypse... Enter the Rich Aunty wa Harrier (aka IMF) who casually releases a statement saying,

18/n "Njuguna (Treasury CS) I don't like how you're cheating people you have money on Mpesa and you know you have maxed fuliza limit" 2. The one thing in the 🇬🇧you don't mess with is People's Mortgages. Because of the Bond Yields going up as explained earlier, it means your

19/n Mortgage interest will go up from like 2% to like 6-7%... So on top of Inflation adding cost of mortgage would eventually lead to social disorder and this is where the Bank of England (CBK equivalent) had to step in

20/n So they released a statement saying "they will buy long dated Bonds and whatever amount to restore orderly markets" in layman's term, this means, they will print as much GBP as is possible to return sanity. End of Episode2. Episode 3 will be on the masters of the Universe



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