Every time the South African economy picks up momentum it is preceded by a surge in the dollar prices of metals and minerals, our major exports, which account for 30% of all output. We can hope with past performance in mind that this time, led by much higher precious metal prices, will not prove an exception.
The favourable wind has continued to blow in the economy’s sails. That is, the prices of gold and platinum in dollars have held up at high levels, though off their highs of late January. They are now still about 30% more expensive than they were on October 1 last year.
The rand and RSA bonds continue to reflect the improving upside for the economy, the currency adding strength against all currencies and especially strong against the emerging market basket since October.
The market in RSA bonds continues to reveal improved ratings — a trend that began in April 2025 with the survival of the government of national unity. The risk spread between a five-year RSA dollar-denominated bond and a US treasury of the same duration is now about 30 basis points lower than the spread of early October, at about 1.3% per annum. Not quite investment-grade credit, but not far away from it.
These recent increases in the price of South Africa’s major exports rival those of the early 2000s, the last time the economy sustained faster growth for an extended period. We can hope that these higher precious metal prices are sustained and that past performance — the highly stimulating demand, credit and money supply responses to higher metal prices of the 2000s — is repeated to some degree.
After 2002, in response to persistently stronger gold and platinum prices, the growth in the supply of money and bank credit grew rapidly as the rand recovered, inflation receded and interest rates fell away. By late 2003 bank credit supplied to the private sector was growing at a robust 20% per annum and continued to increase by 20% per annum until all the strong growth was so rudely interrupted by the global financial crisis. And, one might add, the debilitating Jacob Zuma presidency.
South African banks now hold much excess cash reserves, about R140bn between them. The banks would surely like to convert it into loans, if only there was creditworthy demand for them.
Inflation falling from 12% in 2002 to close to zero in 2004 in response to a strong recovery in the rand and higher interest rates then followed far faster growth in the supply of money and credit. GDP growth averaged about 4.5% per annum in 2002-07. It was a welcome combination of credit-reinforced demand accompanied by additional imports that added to supply. Inflation was also contained by a strong rand-supported increase in flows of foreign capital willing to fund faster growth.
The economy’s response to the higher metal prices of 2025 and a stronger rand is still somewhat muted. Short-term interest rates have receded by 1.5 points but remain high relative to far lower inflation. Yet to encourage spending, the money supply and credit cycles have clearly turned up. The supply of bank credit to the private sector is now up more than 8% compared with a year ago. And with consumer prices largely unchanged over the past six months, credit and money are now growing strongly in real terms.
A new feature of the economy could add impetus to the growth in bank credit and the money supply. South African banks now hold much excess cash reserves, about R140bn between them. The banks would surely like to convert it into loans, if only there was creditworthy demand for them. Which there would be if the economy could sustain faster growth. The Reserve Bank’s ability to control demand for these cash reserves, paying interest on them to prevent their too rapid conversion into bank lending, might be tested for the first time.
Should the rand retain its strength, allowing inflation to remain at about 3% per annum, the case for lower interest rates will be hard to resist. The negative effect of a strong rand on local manufacturers is now apparent, known in the economics literature as the Dutch disease. This might well lead to attempts by the Bank to inhibit rand strength with lower interest rates. Yet more grist to the money supply mill.
Rand stability would contain inflation despite a pick-up in domestic spending. Indeed, should faster growth materialise it would further improve the fiscal outlook and help reduce the risk premium attached to capital invested in the country. And it would attract foreign capital to fund faster growth and further support the rand.
Is it too much to hope for a sustained virtuous cycle of faster growth and less inflation, stimulated as it has been in the past by metal prices sustained at high levels? May the favourable onshore winds continue to blow.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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