South African rand slips amid deadly riots after Zuma’s arrest

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A fire engulfed Campsdrift Park, home to Makro and China Mall, following protests that extended to looting in Pietermaritzburg, South Africa on July 13, 2021, in this screenshot from a video obtained at social networks.

Sibonelo Zungu | Reuters

The South African rand quickly depreciated as the government prepares to deploy more troops, amid widespread violence following the arrest of former President Jacob Zuma.

As the protests now enter their seventh day after Zuma surrendered to police to serve a 15-month sentence for contempt of court, 72 people have died and more than 1,200 have been arrested, according to a police release Tuesday.

As of Wednesday, around 5,000 troops were already on the ground, with riots and looting concentrated in the densely populated provinces of Gauteng and KwaZulu-Natal. The government now hopes to deploy 25,000 members of the South African National Defense Force to quell what President Cyril Ramaphosa has called unprecedented violence.

The rand is now blowing after losing its position as the top emerging market currency of the year and has fallen to its lowest level against the dollar since April. The rand was trading at around 14.56 per dollar on Thursday afternoon, having started June below 13.75.

“Zuma’s imprisonment was the spark that sparked the protests, but underlying issues such as rampant unemployment, widespread inequality and dissatisfaction with the Covid-19 restrictions are the powder keg.” said Aleix Montana, African analyst at risk consultancy Verisk Maplecroft.

Former South African President Jacob Zuma arrives to appear before the State Capture Commission of Inquiry investigating numerous allegations of corruption in government and state-owned enterprises in Johannesburg, July 19, 2019.

Mike Hutchings | AFP | Getty Images

“The currency was hardly affected when Zuma was jailed last week, as it was seen as a welcome move to tackle deep-rooted corruption. The fact that the Rand has weakened significantly in the face of the unrest indicates that investors did not see the protests coming and are concerned about the direction of the trip. ”

The Verisk Maplecroft Civil Unrest Index rated South Africa ‘at high risk’ in Q3 2021 with a score of 2.77 / 10.00, making it the 13th lowest performing country in the world. Sub-Saharan Africa.

He expects the ongoing violence and trade disruption to further erode the country’s performance in the next iteration of the index, with South Africa likely to fall into the extreme risk category.

Between the devil and the deep sea

If indeed the unrest centers on a broader dissatisfaction with the current weakness of the economy, this could hamper the government’s ability to implement austerity measures and restore its debt position on a longer trajectory. sustainable, according to Capital Economics Senior Emerging Markets Economist Jason Tuvey.

The violence also follows a reintroduction of strict Covid-19 containment measures, as the country struggles with a rapid increase in cases. As such, the magnitude of the economic shock will be difficult to extrapolate from the expected slowdown in activity in the near term, Tuvey suggested, adding that the most significant spillover effects could relate to the fiscal position of the United States. South Africa.

“Public finances were in a bad state as the Covid-19 crisis approached and, although the impact was not as severe as initially feared, the budget deficit still grew. established at 11.0% of GDP in the last fiscal year and debt has swelled to 78.8% of GDP, ”he said.

A man walks past graffiti with the words “Free Zuma” as the country deploys an army to quell unrest over the imprisonment of former South African President Jacob Zuma in Vosloorus, South Africa on July 14 2021.

Siphiwe Sibeko | Reuters

One of the key tenets of the government’s tough austerity measures was a three-year pay freeze in the public sector. However, with GDP still 3.7% below its pre-virus peak in the first quarter and an unemployment rate hitting over 30%, an intensification of civil unrest could give unions additional bargaining power in the markets. wage negotiations in the public sector.

“The main risk is that the unrest will prompt the unions, which are the base of the support base (of the ruling party, the ANC), to push for further concessions from the government,” Tuvey said. .

“As the unrest has exposed deep divisions within the ruling party, President Ramaphosa may feel compelled to compromise in order to keep the unions on the side of the ANC leadership elections. ‘next year.”

However, he added that the government had limited room to temper its austerity plans without causing an investor backlash, which would raise yields on local currency bonds and put further downward pressure on the rand.


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