The Banker PM
Another month, another prime minister.
It feels like it was only yesterday when we were discussing the prospects of Prime Minister Liz Truss. But as of this week, following Truss’ resignation and the rapid anointing of Rishi Sunak, we must tear up the past and look ahead to a brave, new and (we hope) more stable political and economic outlook for the UK.
What does Rishi mean for the UK? Can he calm the fomenting markets? How long will he last?
A truly modern Brit
Sunak is the UK’s first non-white and Indian prime minister and its youngest in two centuries. These facts are remarkable, but there’s more to the man than novelties.
On the one hand, he’s everything you’d expect a 21st Century PM to be. After Winchester and Oxford (like the last 5 UK PMs), he completed an MBA at Stanford, before joining Goldman, CIF and founded a tech-focused West Coast fund. Having become an MP in 2015, he rapidly rose through government to become Chancellor in 2019 from where he battled COVID with Boris Johnson. The tumult of recent months aside, it feels like Sunak was always destined for No 10.
But his origin story is more complex. Sunak's parents came to the UK from east Africa and are both of Indian origin. Sunak’s father was a GP, his mother a pharmacist in Southampton and, at its core, his rise is a great British success story, illustrating the benefits of a nurturing immigration policy. His and his family’s success should be cause for celebration.
A financial expert
Perhaps most importantly, Sunak is the most financially literate prime minister we’ve had for many years. Despite his youth, he has solid experience working in markets, and it’s these skills that should stand him in good stead as he assesses how to steer the UK through the perilous situation it finds itself in today.
This article from The Spectator illustrates the point, saying:
“Gordon Brown was regarded as a details man because he read original academic papers. Sunak had a Bloomberg terminal on his desk to follow the metrics from which such papers are drawn. Treasury officials make the same joke about him: no matter how detailed the briefing, he’s more on top of the issue than they are.”
This is refreshing. Exciting, in fact. We’ve lived for too long in a political age where detail, being ‘across the brief’ and ‘in the weeds’ of decision making were dismissed. A line from the 2016 Brexit debates, oft-repeated by Johnson and Truss, was that we’d “had enough of experts”. Not only is Sunak an expert himself on many matters, I sense he won’t be afraid to employ experts. We know that banking is a team sport – I expect Sunak to govern in the same collaborative way.
The backing of the bonds
For bond market professionals, Sunak should be a kindred spirit, a little like “Super” Mario Draghi (a technocrat, a former employee of the World Bank and Goldman Sachs) was for Italy.
The bashing of bankers and techocrats has been a large part of the populist mantra over the last decade, especially in the UK. Johnson and Truss (notably so during the leadership race she fought with Sunak as she attempted to paint his business expertise as a weakness) took delight saying how it was time for experts and academics to stop pontificating and leave the business of governing to people who would “deliver” and “get things done”, repeated ad finitum.
Turns out, when you deliver the wrong things it is hugely damaging, as we were reminded after Truss and Kwarteng blew up the UK economy, notably the market for UK Gilts.
The problem of the deficit
The unfortunate truth is, the UK is more beholden to its bond markets than most major nations. Hence, it’s imperative we have a leader who understands these markets. This isn’t, as most people assume, because of the UK’s debt-to-GDP ratio, which though it stands at 100% and is growing, isn’t as great as others, such as Japan (260%), Italy (148%), or the US (138%). The problem lies in the UK’s current account deficit, which sits at the widest its been since records began in 1955.
A current account reflects whether a country is a net importer or exporter and a deficit must be financed by overseas borrowing. Whilst Italy and Japan enjoy current account surpluses, and the US has a smaller deficit, the UK is in a unique position of vulnerability. The sources of these imbalances are easy to pinpoint: long-term decline in manufacturing exports, a Brexit-driven decline in services, the ongoing energy crisis (as the UK is a net energy importer), to name three. The solutions however, are harder to come by.
Sadly, GBP is a currency that is nowhere near being a relevant reserve currency, unlike EUR, USD or JPY. Nobody needs to hold GBP. Hence why the UK is so beholden to the markets.
The toughest of tasks
And this is why it’s a relief to have someone in power who understands the power of those markets. It’s why we should breathe a little easier knowing there’s someone in power who respects how global finance works and doesn’t think that the UK can make up its own rules.
Amongst other attributes, Sunak has the financial chops, and that’s vital given the tidal wave of pressures heading for the UK this winter. Whether he has the political skill to unite a divided party and a weary country whilst making the tough decisions and choices is a different question.
A fine financial mind? He is. A statesman in a crisis? Let’s see. But we will be rooting for him.
