SA can't only rely on commodities for economic recovery - Reserve Bank

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The commodities boom helped lift the current account deficit to a surplus during the third quarter of 2020.
The commodities boom helped lift the current account deficit to a surplus during the third quarter of 2020.
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  • Higher commodity prices have helped support tax revenue collections and the current account surplus.
  • However, a correction in commodity prices could undermine the broader economic recovery, the Reserve Bank has said.
  • Household spending, a recovery in employment and the vaccine roll-out should continue to support the overall economic recovery.


It is risky for the South African economy to rely so heavily on higher commodity prices for its recovery, the South African Reserve Bank (SARB) has warned.

The bank on Tuesday released its Monetary Policy Review for October 2021.

Commodity prices had increased strongly since 2020. This helped support tax revenues- mainly corporate income tax off gains made by mining companies.

Rhodium prices climbed by a whopping 838.6% and the value of Platinum Group Metals' exports rose by 373.7% between the first quarter of 2019 and the second quarter of 2021, the SARB highlighted in its review. "Other commodities, including iron ore, coal and gold have also registered strong price gains," the review read.

Commodity exports - particularly of rhodium, palladium and iron ore - had also bolstered the trade account and assisted in lifting the current account from a deficit to a surplus during the third quarter of 2020.

During the second quarter of 2021, South Africa's current account surplus widened to its largest on record at R343 billion, Fin24 previously reported.

The current account balance has been in a surplus for four consecutive quarters - and this is the longest sustained surplus in nearly two decades, the review read. The Reserve Bank expects the current account to revert to a deficit in 2023.

Higher commodity prices also supported South Africa's growth performance, according to the SARB.

The rand exchange rate also strengthened.

But as much as the recovery has been underpinned by the commodities boom, a downturn in commodities could have consequences.

"A sudden and sharp correction in commodity prices could undermine the broader economic recovery, unwind the current account surplus and put the fiscal trajectory in jeopardy, while the rand would depreciate, with adverse effects for inflation," the SARB said in its review.

It is necessary for the country to broaden or diversify the sources of recovery, the SARB noted. These include reforms in network services such as electricity, or the removal of constraints for small businesses, increasing the supply of skills in the economy and stabilising public debt, the SARB said.

Reserve Bank Governor Lesetja Kganyago also noted that there is a risk that the resurgence in commodity prices can breed complacency - with companies making certain expenditure decisions if they believe they are richer than they truly are. "South Africa as a commodity exporter should guard against this complacency. This complacency could creep in, including us making commitments or expenditure outlays that we might not afford outside of the rising commodity prices," he said.

During the previous commodity cycle boom, many countries had made expenditure commitments, thinking it would last forever. "But the laws of economics shows, nothing lasts forever," he said. South Africa needs to make sure not to make spending commitments that result in more debt in future, he added. Such expenditure decisions is a function of fiscal policy, undertaken by National Treasury, he said.

The Reserve Bank noted that the climb in commodity prices is "starting to slow".

"… [M]any commodities having turned from their peak levels as supply begins to normalise," the review read. For example, iron ore prices are vulnerable to increasing global supply. Notably iron ore prices are vulnerable to increased global supply - this as Brazilian mining company Vale's operations resumed. Meanwhile demand for iron ore is moderating.

"Although commodity prices appear to have peaked, prices are expected to remain elevated relative to pre-pandemic levels, at least throughout the fiscal year," the SARB said.

As most sectors of the economy have largely recovered from their sharp contractions brought on by harsh lockdown restrictions last year, the Reserve Bank expects household spending and recovery in employment levels to continue to support the overall economic recovery.

"Export earnings will remain firm on the back of robust global demand for the near and medium term," the review read. Furthermore, the vaccine rollout should also support the normalisation of economic activity into 2022.

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