Is SA in the early stages
of a 'virtuous cycle'?
A combination of improving domestic conditions and supportive global trends raises the prospect that South Africa may be entering the early stages of a rare but very welcome phenomenon: a virtuous macroeconomic cycle. What does this mean for investors, and how are we positioning our clients’ portfolios to harness potential opportunities?
A virtuous macroeconomic cycle refers to a self-reinforcing positive feedback loop where progress in one area fuels improvements in others – leading to sustained, broad-based economic growth. In a South African context, the elements of this loop currently include commodity tailwinds, easing inflation, lower interest rates, improved confidence, and a strengthening currency, as illustrated in the chart below:
Commodity tailwinds: The most obviously positive recent development has been the rebound in prices for platinum group metals (PGMs) and gold. These commodities form the backbone of South Africa’s export earnings, and historically, rising prices have translated into stronger terms of trade.
The resulting inflows support the rand, easing imported inflation and boosting domestic purchasing power. A stronger currency not only signals improved export performance but also helps anchor internal price stability by lowering the cost of dollar-denominated imports, particularly oil.
Lower fuel prices: A stronger rand, coupled with stable or declining global oil prices, drives down fuel costs. These prices then feed into the economy’s broader cost structure, providing direct relief to households and indirectly easing cost pressures on businesses. Even with the recent uptick in oil prices due to the conflict in the Middle East, South Africa’s petrol price at the pump remains comfortably below last year’s level.
In an economy where logistics are vital and the consumer basket is highly sensitive to energy and transport costs, lower fuel prices quickly filter through to headline inflation. With consumers feeling less pressure at the pump, disposable income improves – supporting broader spending.
Additionally, lower fuel costs can bolster the credibility of the South African Reserve Bank (SARB) in targeting inflation. With its fresh, if as yet unofficial, aim of targeting 3% inflation, the convergence of external price relief and responsible monetary policy is particularly potent. It sets the stage for the next phase of the cycle.
Lower interest rates: With reduced inflation pressures, the SARB has greater room to continue easing rates. This in turn should stimulate consumption, investment, and broader economic activity. Of course, this is dependent on the direction of global rates, which are also trending lower. In general, South Africa should be able to find more room to manoeuvre without risking capital outflows or exchange rate volatility.
Lower rates improve the debt-servicing capacity of both households and corporates, freeing up cash for more productive use and fostering a more growth-friendly environment. Perhaps even more importantly, lower rates help to reduce the government’s interest bill on its debt.
Stronger government finances: Rising PGM and gold prices don’t only boost export earnings – they also lift government revenue through higher mining taxes and royalties. This influx, together with a declining interest bill, helps support government finances at a critical juncture – easing pressure on borrowing and potentially creating space for higher infrastructure spend off the low base of the past couple of decades.
Healthier government coffers also improve South Africa’s sovereign credit profile. If handled prudently, this can help reverse the long-standing trend of rising debt-to-GDP, restore market trust, and drive the cost of borrowing down further. While we don’t foresee a repeat of the commodity supercycle boom of the years before the 2008 global financial crisis, the current direction is encouraging.
Boost to confidence: Improved macroeconomic conditions alone aren’t enough. Confidence is the crucial bridge between potential and realised growth. Encouragingly, several political and institutional shifts over the past 18 months are now laying the groundwork for cautious optimism.
The formation of the government of national unity (despite its periodic hiccups), improved stability at Eskom and better performance from Transnet (albeit off a low base) are all helping to support business confidence. While the base is admittedly low, businesses are notably more inclined to deploy capital than they were 12 to 18 months ago. As confidence builds, it feeds into investment, hiring, and long-term growth planning – pushing the economy into a more sustainable trajectory.
Currency strength: A confident domestic economy – characterised by rising output, predictable governance and fiscal discipline – attracts capital. Foreign direct investment, portfolio inflows and domestic capital retention all contribute to currency support. This reinforces the initial driver of the virtuous cycle, a stronger rand, which in turn continues the positive feedback loop through contained fuel prices, dampened inflation, lower interest rates, and business and consumer confidence.
South Africa has rarely enjoyed the benefits of a full virtuous cycle. More often, the economy has been trapped in a vicious cycle of low growth, fiscal deterioration, policy drift and infrastructure failures. The risks therefore remain real. Any breakdown in coalition politics, renewed loadshedding or a global economic slowdown could derail the process. External shocks – such as rising oil prices, falling precious metals prices, a resurgence in global bond yields or large-scale geopolitical events – could all reverse progress.
That said, the cycle outlined above represents an optimistic but credible scenario: a convergence of domestic reform, supportive commodity prices and improved policy credibility, which together create the conditions for more sustainable growth.
South Africa may well be in the early stages of a self-reinforcing economic virtuous cycle. But such opportunities are often both fragile and fleeting. Some good fortune will be required, but if nothing else, the high metals prices offer a positive tailwind.
Against this backdrop, at Sanlam Private Wealth we have tilted our multi-asset portfolios towards rand assets, while we continue to grow the exposure to quality South African-focused businesses in our local equity portfolios – more recently through positions in Clicks, Sanlam and Standard Bank.
