I wrote one blog post about investment risks in 2022. That was my first try. I was pretty ready for a completely wrong guess. But somehow that came right. You can read it Investment decision in 2022: Really what are risks?
So I decided to try this further this year, in addition, I will review 2022 and big financial events.
So what are the significant financial events which dominated 2022? the war in Ukraine holds the trophy. It destroys the supply of food for many African countries and many other markets. Ukraine was also a supplier of some important parts of car manufacturing. I talked about the war in length in my another posts Ukraine war: What will be the effects on the world after the war and Why did Russia attack Ukraine?
But that was one highlight of the year. Russia itself is the biggest energy exporter. before the war, Russia accounts for 40% overall supplier of energy to Europe. Many countries were fully dependent on Russia. Including British. After the war started, many western countries sanction Russia. Many companies left Russia. Many Russian banks were removed from the SWIFT system. In response, Russia forced many European countries to pay for oil in the ruble. Russia stopped gas supply through Nordstream 1 and Nord Stream 2 which was supposed to start this year but didn’t start its operation. Many entities received personal sanctions. There was a risk of not having sufficient gas for winter but somehow that was managed. This somehow made the situation in Britain worst as they were not keeping big storage or having dependable oil drills which are dependable. As the bill of fracking proved a vote of trust for Liz truss, It’s clear that the British economy which already facing the Effects of the pandemic and Brexit is now ready for one more blow.
Bigger turmoil was waiting in British politics. Boris Johnson, close the deal and left Europe on 1 January 2021, forced to resign. Liz truss becomes the Prime minister but Trickle down Budget dressed as Mini budget, didn’t receive well in British markets. it added problems for the British government, which is facing the question of whether Brexit is successful or failed. The pound went downward and interest costs increased for the government. I can say that the death of British Queen Elizabeth II was not a good omen for the country. Energy crisis, inflation crisis, strikes, and NHS crisis, 4 different crises were not sufficient, Short term Chancellor of the exchequer made it worst, by removing the cap on bonuses of bank heads and reducing tax. The market didn’t find how the govt was going to fund those expenditures. It was clear that government borrowing will be higher. The yield on British govt bonds starts rising and the pound fall. That was sufficient for people to remember Rishi Sunak told them that this was a possibility. Rishi heading the country since then. But issues are still there. The energy crisis was covered somehow with the help of Government interference when Germany and France took their ways. France nationalise companies that supplied gas. Strikes are still going on as the wages are lower and insufficient to cover their lives. Former PM Gorden brown gave the idea of nationalizing power companies. but that didn’t happen.
Inflation was an overall big issue. 2022 saw Central Bankers in action. Though the reasons were different. Europe’s inflation was the highest for quite some time. But they were not heroes of 2022. The hero or villain of this year was Jerome Powell. It’s easy to forget that the Fed was holding the federal funds rate at around zero as recently as the first quarter of 2022. The Fed was also still buying billions of dollars of bonds every month to stimulate the economy. All despite 40-year highs in various measures of U.S. inflation. This year saw the Federal reserve actively being a buyer at the start of January then saw the federal reserve keeping the target of selling bonds and reducing its balance sheet to $1.14 trillion per year. which looks impossible as they are not selling as per schedule. From starting with a rate hike of 25 basis points, the world saw the Federal reserve raising 75 basis points consecutive 4 times. That’s why rates in the US are 4.25% – 4.50% at the end of 2022.
2022 will also be remarkable as the noble price for economics this year was given to Ben Bernanke. as per the Website of Nobel Prices, “Through statistical analysis and historical source research, Bernanke demonstrated how failing banks played a decisive role in the global depression of the 1930s. Bernanke’s research shows that bank crises can potentially have catastrophic consequences.”
If I didn’t mention the mini-budget of England, It will not be right. On 23 September 2022, the Chancellor of the Exchequer, Kwasi Kwarteng, delivered a Ministerial Statement entitled “The Growth Plan” to the House of Commons of the United Kingdom. Widely referred to in the media as a mini-budget (not being an official budget statement), it contained a set of economic policies and tax cuts such as bringing forward the planned cut in the basic rate of income tax from 20% to 19%; the abolition of the 45% higher rate of income tax in England, Wales and Northern Ireland. the reversal of the April 2022 increase in National Insurance; and the abolition of the proposed Health and Social Care Levy. Following the widespread negative response to the mini-budget, the planned abolition of the 45% tax rate was reversed 10 days later, while plans to cancel an increase in corporation tax were reversed 21 days later. The government announced in the mini-budget that from 6 April 2023, the additional rate applying to dividend income would be abolished and the 1.25% rise in the dividend rates, initially brought into force in April this year, would be reversed.
China saw its crisis in 2022. Real estate companies saw default and bankruptcy. A total of 19 companies including Evergrand, Shimao filed for bankruptcy. BlackRock and HSBC are among the largest buyers of Evergrande debt. China’s financial crisis is getting worse. Chinese banks, anticipating huge loan losses, have taken dramatic steps to enhance their loan loss reserves, tapping China’s bond markets for some 30 percent more funds than they did last year. China’s property slump is estimated to cost the nation’s banking system as much as 1.5 trillion yuan ($212 billion) in losses on loans, bonds, and other assets, according to UBS Group AG. Credit to the nonfinancial sector came to $51.87 trillion, or 295% of gross domestic product, to mark the highest debt-to-GDP ratio in data going back to 1995, in statistics released by the Bank for International Settlements.
Many Chinese people lost their savings in banks as the balance sheets of Real estate developers and banks were connected. Banks lend so much to lenders that it was easy for many construction companies to take new loans to pay the old loans. Things become worse when the Chinese Communist party came up with 3 red lines policy which was sufficiently bad and made a strain on many financial entities. The effect was no new construction, a halt of old construction. People not receiving their house even after payment. This all increase by covid restrictions and lockdowns. As many companies are having their manufacturing plants in china, it was not shocking that companies like apple are facing big issues.
In India, we saw credit uptake. Consumption was always a theme in India but we saw the biggest lender SBi declaring Rs 5 lakh crore as a personal loan book. Big. NPA cleanup was taking place and so many banks concentrate on retail. Infra push was visible.
2022 saw another trend of de-dollarisation. Many countries realize that the Dollar can be used as a weapon. As swift is a medium of communication for banks for their international, this can also be used as a weapon. So many countries were in search of any other currency for their bi-party trade. India made its currency Rupee, offshore Chinese currency was also get accepted by some countries.
Srilanka is another piece of news in the media. the world saw people protesting in the House of the Rajapaksa family. many of the houses and properties were burnt by people in Sri Lanka. One big reason was not having sufficient money. Srilanka’s economy is based on Tourism. COVID made that situation worst and also higher prices of oil burned the pocket of the country. Pakistan saw a similar situation where the Prime minister resign and the new prime minister need to increase fuel prices just to receive IMF help.
So what are the things I am expecting from 2023?
First of all, All over the world, Central banks reacted to Inflation, it shows the effect and we saw inflation coming down. But the housing market in many countries is in bad shape and prices are way higher. availability of new houses is affected in some areas like Uk. Federal Reserve is trying its best to achieve its target of 2% inflation and seems they are not far away. but hefty actions and as they said, Central bank induced recession is already here as per some economy watchers. The United States is a consumption economy. If they are getting affected, somehow the whole world will be affected.
Central banks worldwide will start reducing rates as it’s impossible for them to stay such high for the long term. Especially for economies like Briton. where rates were 1.5% or the USA where the Federal Reserve was buying bonds one year back and all of a sudden they stopped and start selling from their portfolio.
Another question is what will happen to the dollar. The dollar is recognized as the global currency of reserves. Even before the war, Russia sold all dollars and Forced Buyers of Russian oil to pay in Rubles. Chinese Yuan, an offshore currency was accepted as another by some people but the situation for Euro was not much good. What will happen with it? 2023 will be answered.
Another answer, that 2023 holds for us is the fate of Europe. War in Ukraine shows the fault lines as if Ukraine gets added to the EU, it will be a boost for eastern European countries. Like Poland, Latvia Lithuania, and Estonia. Former enemies of Russia. That will be a big change of center from France, Germany. Right now while I am typing this, the Authority figure in Europe are France and Germany. Anyway, Norway Poland baltic pipe gas pipeline was something that gave a boost to the image of Poland, which was known as the problem child of Europe. Now someone else holds that.
Another big question in 2023 will be what will be the energy source of Europe. Europe was planning to leave its use of oil and increase, the use of Renewable sources. But war started and the process was halted, Germany and other EU countries invested for use of renewable resources but we all know they can’t be ready in one day. But that is n to the transition which will be done in one day. Gas was one stop for them. Now as Russia is not there to supply, what will be there? where will be the price of Oil and gas will stabilize. Who will stabilize the price and who will be another supplier of energy? This is the big question. Because Azerbaijan can be that one force but the moment I talk about Azerbaijan, You will remember Armenia and Nagorno Karabakh.
The redevelopment of Ukraine will be a big project. I am not an expert but what I am listening to is horrible. After the second world war, it cost the redevelopment of Europe at its current level of $15 billion. As per one calculation today the cost of redevelopment of Ukraine is $500 billion and it is increasing. The whole steel industry in Ukraine is destroyed, and Mining is destroyed, Energy infrastructure is destroyed. The only thing which stands out is wheat export. that is also due to some support of Ukraine and other countries coordination.
What will be happening in China? no there are no elections but the country is the manufacturing hub of many companies. it is a must to think about it. Another question is when someone is giving competition to the US and making their currency competitive against the dollar which was impossible to be euro for a long time. When everyone outside was enjoying the FIFA world cup, there was a lockdown. Now there is no lockdown but the news we are listening to about covid is a question mark on the strategy of making overthinking in china. Yes, Some already stayed in china +1 but that will take time.
Cryptocurrencies. Where it will be. I don’t know. Crypto will be there beyond doubt, without them it was impossible to reduce transaction costs for large amounts like million. But crypto as currency? I am not supportive.
Another thing that I was thinking of not writing but still going to write is OPEC. Yes is it politics but as they decide many things in global economics I am writing about them. After the emergence of the US as an oil exporter and after the war in Ukraine, they are one big supplier of Europe, What will be the future of OPEC? Russia and the US can easily sell 50% of the oil demand so the question is will they hold power, the relationship between Saudi and the US is worst after Jamal Khashoggi. so OPEC+ will there be any more effective? Germany and other counties reducing the use of oil and planning to use hydrogen as fuel. What about the big industry?
India. My country where I am living. 2023 will be the year before a big election. some states where elections are scheduled. This will be the last full budget. So it will be worth watching what our government will do and say about the budget. another thing I can say about India is we are heading to make the rupee digital currency. E-Rupee is here. though not full, the start is here.
