The World Health Organisation has labelled the latest Ebola outbreak in the Democratic Republic of Congo ‘deeply alarming’, a phrase that should send a chill down the spine of every prudent investor. Not because of the humanitarian tragedy, though that is of course horrific. No, because history tells us that viral outbreaks in unstable regions tend to metastasise into fiscal haemorrhages for Western treasuries.
This morning, the UK government has pledged £50 million in emergency health aid. A noble gesture. But from a taxpayer’s perspective, it is yet another unhedged liability in a portfolio already bloated with pandemic-era debt.
Let’s look at the balance sheet. The DR Congo is the size of Western Europe with infrastructure that would make a Victorian slum seem efficient. Containing Ebola requires boots on the ground, cold chains for vaccines, and a functioning local health system.
None of which come cheap. The UK’s contribution will likely be channelled through multilateral organisations, where oversight is notoriously opaque. I recall the 2014 West African Ebola crisis: the initial £20 million pledge eventually ballooned to over £400 million.
Call it a ‘cost overrun’ if you are feeling generous. Call it what it is: fiscal incontinence. Meanwhile, gilt yields remain stubbornly elevated.
The market is pricing in a higher risk premium on UK sovereign debt, partly due to these recurring off-balance-sheet commitments. The Bank of England’s monetary tightening cycle is already a drag on growth. Adding a standalone £50 million charge, plus the implicit guarantee of more to come, is like throwing fuel on a rate hike bonfire.
The capital flight risk is real. International investors are starting to question the UK’s fiscal discipline. When the next gilt auction comes around, will sovereign wealth funds still be buyers?
Or will they shift their allocations to economies with fewer ‘surprise’ liabilities? The prudent move for households is to treat this as a portent. Stock up on canned goods if you wish, but more importantly, review your exposure to UK government bonds.
The epidemic curve in the DRC is a leading indicator for the UK’s debt trajectory. If the outbreak spreads, expect the Treasury to write another cheque. And another.
The bottom line: the market does not respond to good intentions. It responds to cash flows. This £50 million is a leak in the fiscal dam.
Investors should act accordingly.
