South Africa has a big opportunity to save its economy

South Africa could be in the early stages of a virtuous macroeconomic cycle, with a combination of improving domestic conditions and supportive global trends setting the country up for success.

If South Africa plays its cards right and capitalises on the opportunity, this self-reinforcing cycle could see the country’s economy perform better than it has in years.

Sanlam Private Wealth chief investment officer David Lerche recently unpacked the elements that constitute South Africa’s virtuous cycle. 

He explained that a virtuous macroeconomic cycle is a self-reinforcing positive feedback loop where progress in one area fuels improvements in others.

He believes this could lead to sustained, broad-based economic growth for South Africa.

For South Africa, the elements constituting the “loop” are commodity tailwinds, easing inflation, lower interest rates, improved confidence, and a strengthening currency.

“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,” Lerche said. 

“The risks, therefore, remain real. Any breakdown in coalition politics, renewed load-shedding, or a global economic slowdown could derail the process.” 

He warned that external shocks like rising oil prices, falling precious metals prices, a resurgence in global bond yields or large-scale geopolitical events could all reverse progress.

However, Lerche said that while the cycle is optimistic, it remains credible, and the conditions for more sustainable growth are there.

“South Africa may well be in the early stages of a self-reinforcing economic virtuous cycle,” he said. 

“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.”

Lerche outlined the six elements constituting South Africa’s virtuous feedback loop and how they work together to create a supportive environment for the country’s economy to grow. 

South Africa’s ‘loop’ of opportunities

Firstly, Lerche said commodity tailwinds are the most obvious recent positive development, particularly for gold and platinum group metals prices.

He explained that these commodities are the backbone of South Africa’s export earnings, and historically, their rising prices have resulted in stronger terms of trade.

Terms of trade indicate the ratio between a country’s export and import prices. Therefore, stronger terms of trade mean the country is gaining more capital from exports than it is spending on imports. 

Lerche said the higher capital inflows support the rand, ease imported inflation and boost domestic purchasing power.

This is because a stronger currency reflects improved export performance and anchors internal price stability by lowering the cost of dollar-denominated imports like oil.

In other words, a strong currency typically translates into more money in South Africans’ pockets.

This is where the second element in South Africa’s “loop” is activated – lower fuel prices. A stronger rand and stable or declining oil prices drive down fuel costs.

Since fuel prices are a universal input, Lerche explained that they feed into the economy’s broader cost structure, making things cheaper for households and 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,” he said.

“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.”

This is positive for citizens and the economy, as household consumption expenditure is a major driver of economic growth in South Africa.

Lerche explained that a lower fuel price is also good news for the South African Reserve Bank (SARB), as it bolsters the central bank’s credibility 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,” he said.

Closing the loop

This feeds into lower interest rates, the next element of South Africa’s “loop”, which centres around the link between monetary policy and government finances.

Due to lower inflation and a more moderate inflation outlook, the Reserve Bank has been able to cut South Africa’s interest rates by 100 basis points since September 2024.

This should, in turn, stimulate consumption, investment and economic activity among the country’s households and businesses. 

“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,” he explained. 

Crucially, lower rates also help to reduce the government’s interest bill on its debt, which spells good news for the struggling fiscus.

The next element in South Africa’s “loop”, stronger government finances, is supported not only by lower interest rates but also by rising commodity prices.

Higher commodity prices mean higher profits for local mining companies and, consequently, higher tax revenue for the government.

“This influx, together with a declining interest bill, helps support government finances at a critical juncture,” Lerche said. 

He explained that it eases pressure on borrowing and potentially creates space for higher infrastructure spending off the low base of the past couple of decades.

This also increases South Africa’s chances of improving its credit rating, boosting foreign investment and overall confidence in the country.

This boost to confidence is the next stage in South Africa’s cycle, which Lerche describes as the “crucial bridge between potential and realised growth”.

For this element, South Africa has already seen several positive developments boosting confidence in the country.

This includes the formation of the Government of National Unity, a more stable Eskom and reforms at Transnet.

“As confidence builds, it feeds into investment, hiring, and long-term growth planning – pushing the economy into a more sustainable trajectory,” Lerche explained.

The final element in South Africa’s virtuous cycle is currency strength, which is encouraged by all other elements in the loop.

“As confidence builds, it feeds into investment, hiring, and long-term growth planning – pushing the economy into a more sustainable trajectory,” Lerche said.

“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.”

The interaction of all these elements can be seen in the diagram below, courtesy of Sanlam Private Wealth.