The GBP is experiencing a recent dramatic decline. As a result, according to the economists at HSBC, further FX adjustment may be required to finance wider deficits and more significant debt burdens by foreign inflows.
The UK’s public finance position regarding relative debt dynamics will worsen materially in the year ahead. The GBP does not enjoy any special privilege in financing this burden.
A significant decline from a 2% of GDP surplus to an 8% of GDP deficit in the last two years has affected the UK’s core balance. This requires more significant short-term capital inflows to keep the GBP on an even keel.
If foreign investors suspect that inflation or FX depreciation is utilized to pay for an unsustainable debt, they may be reluctant to finance it initially.