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EXPLAINER | Why is the British pound in freefall?
Africa-news

EXPLAINER | Why is the British pound in freefall?

September 29, 2022
0

On Monday, the pound sank to a record low against the United States dollar as investors rushed to sell the currency and government bonds in a major vote of no confidence in new Prime Minister Liz Truss’s economic plans, which include large tax cuts funded by steep increases in government borrowing.

The pound at one point in Asian trading sank as low as $1.0327, surpassing the previous record low reached in 1985, before making back some of its value.

The rand was last trading at R19.43 against the pound, from around R21.20 at the start of 2022.

The price of 5-year UK bonds — through which investors loan money to the government in return for interest — recorded the sharpest fall since at least 1991.

Under Chancellor of the Exchequer Kwasi Kwarteng’s “mini budget” announced on Friday, the UK is proposing the biggest tax cuts in 50 years, including abolishing the 45 percent tax rate on incomes over 150 000 pounds (R2.9 million).

The tax cuts, along with a plan to support household’s rising energy bills, will require the government to borrow an extra 72 billion pounds (R1.4 trillion) in the next six months alone.

As with other goods and services, the value of most of the world’s major currencies operates on the principle of supply and demand.

When demand for a particular currency is high, the price goes up and vice versa.

The pound’s plummeting value indicates that investors are concerned about the UK’s ability to manage so much extra debt, especially as rising interest rates make borrowing much more costly.

On Monday, Raphael Bostic, a top official at the US Fed, warned that the tax overhaul had “really increased uncertainty” and raised the risk of a global recession.

“Confidence in the UK economy is low right now,” Pao-Lin Tien, an assistant professor of economics at George Washington University, told Al Jazeera.

“The new prime minister’s economic policy of lowering taxes on the wealthy is not too popular, and the consensus is that it will not work in stimulating the economy.”

While the UK’s tax plans were the initial trigger of the pound’s freefall, economists say that investors’ confidence in the British economy has been waning for some time due to developments such as Brexit.

“The British pound has long been suffering for political decisions in the UK,” Alexander Tziamalis, a senior economics lecturer at Sheffield Hallam University, told Al Jazeera.

“It has been hit by Brexit and is also facing the prospect of a second Scottish independence referendum and a potential trade war with the EU over the Northern Ireland protocol.”

What can the UK do to stop the pound’s decline?

The main tool available to prop up the pound, or any other falling currency, is to raise interest rates in order to attract foreign investors with better yields.

On Monday, Andrew Bailey, the governor of the Bank of England, said the central bank would not hesitate to lift rates as necessary.

But despite calls from some economists for emergency action, the UK’s central bank opted against an unscheduled rate hike, sending the pound down to $1.06 after it made some earlier gains.

“Both the Bank of England and Bank of Japan can decide to raise rates to match the rising US interest rates,” said Tien, the professor at George Washington University.

“This will help, but if investors don’t see aggressive enough actions from BoE or BoJ — so not just an increase in rates, but a larger than expected increase in rates — it won’t help much with the currency values. The issue with aggressively large interest rate hikes is that it’s likely to push the economy into a recession, which no one wants to see.”

Governments can also intervene by buying up their own currency to prop up its value, although this is frowned on by many economies and risks invoking trade penalties.

“The pound and yen are officially floating exchange rates, governments should not and do not often intervene in the forex market,” Tien said.

Why is the US dollar so strong?

The strength of the US dollar, which has been on an upward trajectory since mid-2021 and last month hit a 20-year high against six major currencies, has two main drivers.

The first is confidence in the US economy relative to its peers.

Much in the same way a weakening currency reflects declining investor confidence in a country’s economy, a strengthening currency points to a vote of confidence in an economy’s fundamentals.

While the US economy is battling high inflation and flagging growth, the dollar has long been seen by investors as a reliable bet.

“The US dollar has always been seen as a safe haven for investors because the US is such a strong and large economy, so if there is global uncertainty, it’s always a safe bet to hold US dollars because it retains value well,” Tien said.

“So with the war in Ukraine, economic and political problems in Europe, high inflation, etc, it is not surprising investors are turning to the US dollar.”

Marc Chandler, chief market strategist at financial consultancy Bannockburn Global Forex, said that the US seemed like a safe bet to investors in light of global events even if it recorded negative growth during the last two quarters.

“The US biggest rivals have shot themselves in the foot. Here I am thinking of Russia’s invasion of Ukraine and China’s zero-Covid policy that has disrupted growth,” Chandler told Al Jazeera.

“The US allies are also having serious struggles. Japan is the only G10 country not to raise interest rates.  China actually cut rates recently.  Europe is on the verge of a recession and the UK’s new government has stirred crisis talk with its fiscal stimulus adding to its current account deficit.”

The second driver of the dollar’s rise is interest rate hikes by the US Federal Reserve, which has been raising the cost of borrowing in an effort to tame soaring inflation.

With depositors at US banks benefitting from interest rates, investors have been further encouraged to swap other currencies for dollars, pushing up the price of the greenback.

“Of course, central banks in other jurisdictions such as the UK have also been raising interest rates, and the eurozone is planning to do likewise. But they are not acting as aggressively as the US,” said Tziamalis, the economics lecturer at Sheffield Hallam University.

“Meanwhile Japan is not tightening at all, so the net result is still greater overseas demand for greenbacks.”

Who are the winners and losers?

For US consumers, a stronger dollar means cheaper imported goods in the shops and more affordable holidays abroad.

For everyone else, the picture is less rosy.-fin24

Botswana resumes beef exports
Africa-news

Botswana resumes beef exports

September 28, 2022
0

Botswana has resumed exports of live cattle and beef from areas declared free of foot and mouth disease (FMD). 

How do I know I have a debt problem?
Africa-news

How do I know I have a debt problem?

September 27, 2022
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Your debt problem may be a small one that is just beginning or it may have already escalated into something unmanageable. In whatever situation you find yourself with your debt, the first step is identifying that you have a problem.

These are the best airlines of 2022
Africa-news

These are the best airlines of 2022

September 26, 2022
0

As the world finishes unpicking its Covid-19 travel restrictions, business trips and tourism are firmly back on the agenda — in most places, anyway. The question is, who to fly with?

Qatar Airways has been named the world’s best airline at the Skytrax World Airline Awards 2022, while Singapore Airlines and Emirates landed in the second and third spots respectively.

In a strong showing for Asia-Pacific carriers, Japan’s All Nippon Airways Co and Australia’s Qantas Airways rounded out the top five, while Hong Kong’s largely grounded Cathay Pacific tumbled to 16th place from sixth place last year.

The awards also broke down the best airline for each cabin class. Best first-class cabin went to Singapore Airlines, while Qatar picked up best business class. Virgin Atlantic Airways won for premium economy and Emirates for best economy cabin.

In other categories, Singapore Airlines’ budget carrier Scoot took top place for best long-haul low-cost airline; Singapore Airlines also scooped best cabin staff; and ANA were number one for cabin cleanliness.

“Qatar Airways was the largest airline to have flown consistently throughout the Covid-19 pandemic, with their network never falling below 30 destinations,” Skytrax chief executive officer Edward Plaisted said in a press release. “That determination has clearly been well recognized by customers.”

The World Airline Awards were determined by an online customer survey that ran from September 2021 to August 2022 in English, French, Spanish, Russian, Japanese and Chinese. More than 350 airlines featured in the final results.

Here are the top 20 airlines for 2022:

  1. Qatar Airways
  2. Singapore Airlines
  3. Emirates
  4. All Nippon Airways (ANA)
  5. Qantas Airways
  6. Japan Airlines
  7. Turk Hava Yollari (Turkish Airlines)
  8. Air France
  9. Korean Air
  10. Swiss International Air Lines
  11. British Airways
  12. Etihad Airways
  13. China Southern
  14. Hainan Airlines
  15. Lufthansa
  16. Cathay Pacific
  17. KLM
  18. EVA Air
  19. Virgin Atlantic
  20. Vistara     -Moneyweb
Bad news for South Africa as renewable power projects delayed
Africa-news

Bad news for South Africa as renewable power projects delayed

September 21, 2022
0

South Africa will move ahead with the allocation of three onshore wind stations from a delayed round of bidding to provide renewable power, an initiative intended to help mitigate record levels of power cuts.

Africa poised for rate-hike week, though outliers multiply
Africa-news

Africa poised for rate-hike week, though outliers multiply

September 21, 2022
0

Africa’s three biggest economies are poised to raise interest rates this week, while policy makers in several other countries stake out different approaches to navigate inflation shocks and bring prices under control.

Rate hikes: A double-edged sword for central banks
Africa-news

Rate hikes: A double-edged sword for central banks

September 20, 2022
0

Central banks worldwide are using aggressive interest rate hikes to lasso galloping inflation, at the risk of pulling down the global economy with it.

Botswana to cull 10 000 cattle to curb foot-and-mouth outbreak
Africa-news

Botswana to cull 10 000 cattle to curb foot-and-mouth outbreak

September 20, 2022
0

Botswana, a top beef exporter to the European Union, plans to slaughter 10,000 cattle to curb an outbreak of foot-and-mouth disease, a minister said Monday.

What to expect from South Africa’s interest rate hike this week
Africa-news

What to expect from South Africa’s interest rate hike this week

September 19, 2022
0

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) is set to hike interest rates on Thursday (22 September) this week in an attempt to support the rand and control inflationary forces, but economists differ in expectations on how much.

Volkswagen seeks to raise US$9.4bn in Porsche IPO
Africa-news

Volkswagen seeks to raise US$9.4bn in Porsche IPO

September 19, 2022
0

Volkswagen AG is looking to raise as much as 9.4 billion euros ($9.41 billion) from the initial public offering of its iconic sports-car maker Porsche AG in what could be Europe’s largest listing in more than a decade.

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