When a Country Exhausts Options, Who Pays the Price?

Japan engaged in purchasing its own currency, while China ceased its oil purchases. Meanwhile, the US has found that investors now demand a 5.22% yield to lend money for 30 years.

These actions convey a unified narrative: when a crisis strikes, countries with options can safeguard themselves. Conversely, nations without alternatives impose the burdens of a crisis onto their citizens.

Read: The world has transformed – African nations must reconsider their economic growth strategies.

Japan serves as an extraordinary case study. For many years, its government, central bank, and public pension funds amassed substantial foreign investments while enjoying low borrowing costs domestically.

Collectively, these foreign assets equate to more than half of Japan’s GDP and have averaged a 5.8% annual return over the past 25 years leading up to 2023.

This strategy thrived as Japanese interest rates remained near zero. However, with inflation returning, expectations are set for rising interest rates.

In response, Japan has begun selling dollars and acquiring yen following a depreciation of its currency beyond ¥160 against the dollar. Given that many dollars were purchased when the yen was stronger, Japan could have realized gains of up to $36 billion while stabilizing its currency.

Read:

Investing in Japan: The Pros and Cons

Yen plummets to a four-decade low in a historic downturn rattling Japan.

This issue extends beyond Japan.

If rising Japanese interest rates persuade its investors to repatriate funds, they may liquidate foreign bonds, leading global borrowing costs to increase further.

What begins in Tokyo can eventually impact South African bond yields, the rand, and the repayments on our home loans.

China charts a different course

China navigated differently when the war in Iran disrupted oil flow through the Strait of Hormuz. Instead of frantically competing for oil, it curtailed imports by roughly 5.5 million barrels per day.

Thanks to its oil reserves, electric vehicles, public transportation systems, and capacity to limit fuel exports, China was able to consume less without hindering its economic activity. This move may have kept Brent crude prices more than $30 lower than they otherwise would have been.

The Organisation of the Petroleum Exporting Countries (Opec) influences oil prices by limiting supply. However, China demonstrated that the world’s largest consumer can also affect prices by constraining demand.

Read:

Oil steady as US-China summit commences amid Iran war deadlock.

The new superpower dilemma: Who can be trusted when fears escalate?

While stockpiles will eventually decrease, this strategy afforded China time and helped protect oil-importing nations like South Africa.

Nevertheless, a crucial warning arises. Some Chinese entities established to eliminate bad debts from banks have instead concealed them. They borrowed at low rates, extended credit to struggling property developers, and obscured losses.

Now, some of these financial rescue organizations require rescuing themselves. Transferring a problem does not equate to resolving it.

South Africa requires more options

This growing divide is apparent elsewhere.

Switzerland embraced this tumultuous period with low inflation, prudent public finances, and dependable institutions. Surprisingly, its economy grew by 1.5% in the second quarter, largely thanks to the pharmaceutical sector.

Although the US holds significantly more influence, its debt nearing $40 trillion means a growing portion of future tax revenue will be consumed by interest payments. Eventually, even a superpower exhausts its options when it over-borrows.

South Africa retains significant defenses: a flexible rand, robust financial markets, and a credible Reserve Bank. However, we rely on imported oil, bear a substantial burden in servicing government debt, and remain susceptible to unreliable electricity, railways, and ports.

Unlike Beijing, we cannot command our economy, nor can we borrow as effortlessly as Washington. Thus, when the next external shock occurs, the government may be unable to manage it.

Households and businesses will bear the brunt through rising fuel prices, escalating food inflation, higher interest rates, increased taxes, or diminished public services.

This underscores the importance of repairing infrastructure, reducing debt, and developing alternative energy sources. These are not mere policy aspirations; they are vital for creating more choices.

What does resilience mean?

Investors should adopt a similar mindset.

Don’t just focus on the growth rate of a country or a company. Examine its ability to refinance debt, replace essential suppliers, withstand currency depreciation, or endure challenging periods.

Read: When an ice lolly becomes an economic warning.

Growth illustrates how quickly something progresses in favorable conditions. The available choices dictate whether it can weather unfavorable conditions. When a country runs out of options, its citizens are left to bear the consequences.

Dr. Francois Stofberg is a financial wellness economist at the Efficient Group.