Markets and rand stability during Zuma arrest protests

The rand is starting to show impact of the riots in South Africa, trading at over R14.62 to the dollar on Tuesday, much higher than the R14.22 of Sunday.

The arrest of former president Jacob Zuma did not affect the rand, but the riots and looting will have a negative impact on the local economy.

“The rand is treading water, losing over 1.2% since markets opened this morning and briefly touching on the R14.60 mark this afternoon. Tensions continue to rise and the prospect of the country as a viable investment destination is being questioned as the rest of the world watches from the sidelines,” says Bianca Botes, director of foreign exchange specialists Citadel Global.

The looting and destruction will have repercussions on an already fragile economy that will be felt by all citizens for years to come, she says. “While we have seen emerging markets as a whole shed some ground against the dollar, the rand is by far the worst performer as a result of the local situation. Investors will be keeping a very close eye on the government’s response and ability to stabilise the situation.”

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In a Catch-22 situation, many international investors consider Zuma’s arrest a positive development for democracy and a boost for business confidence, but others might regard the violent protests and looting as a deterrent.

As South Africans, we are often of the opinion that the local currency will be dominated by what happens within our borders, but in reality it is quite the opposite, Botes says. “Most of what drives the rand is based on global events and risk sentiment in the global financial market environments.”

She says the rand had recovered significantly from the pandemic-induced lows which topped R19.30 in April 2020. “However, this recovery is not attributed to events in South Africa. Locally, South Africa still faces a dire economic trajectory, which was only worsened by the pandemic.”

The good news is that while national tension will bring negative sentiment, it will not dictate the direction of the rand, but merely be one of the contributing factors, Botes says. “Other local factors that forex specialists will monitor closely are Eskom’s electricity supply and the on-going local economic turmoil due to Covid-19.”

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According to Botes, emerging market currencies are trading softer, but a risk premium has been built into the rand due to the unrest. She says as political tensions and riots have seen numerous economic hubs come to a standstill, the rand will trade slightly softer against the dollar.

The global factors that will keep driving the direction of the rand over the coming months will be global growth and inflation, rising Covid-19 cases and its effect on the global economic outlook sentiment and additional fiscal stimulus expected from US President Joe Biden.

“It is understandable that people are concerned about the consequences recent South African events could have on the rand, but it is important to remember that the global climate is just as fragile and the global factors will be more significant than recent events.”

Botes says Zuma’s arrest had been overshadowed by the real economic hurdles South Africa will continue to face whether he remains behind bars or not, alongside global factors such as reflation, stimulus and global growth.

“Despite this, there is a real concern about the effect of the protests and looting on the economy. The violence is likely to offset any positive inroads made into South Africa’s global reputation by Zuma’s imprisonment and the damage to property, as well as the job losses to follow, will certainly add to the fragility of the local economy.”

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