The riots added to the disruption from a lockdown, extended by president Cyril Ramaphosa on Sunday night for a further two weeks in an effort to curb the pandemic.
“It is difficult to tell which is the greater emergency in South Africa right now: the riots, which have resulted in significant property damage, looting and affected the movements of goods along an important trade corridor, or the continued spread of Covid-19,” Siobhan Redford, an analyst at Rand Merchant Bank in Johannesburg, said in a client note.
“It will be important to see the government take action.”
The rand declined as much as 2% and was 1.7% weaker at 14.4681 per dollar by 2:18 p.m. in Johannesburg, heading for its weakest level since April 30. One-month implied volatility on the currency pair touched the highest in almost three weeks.
While the rand remains this year’s top emerging-market performer, strategists have turned more bearish on the currency as a spike in Covid-19 cases keeps expectations for tighter monetary policy at bay.
Morgan Stanley favours long dollar positions against “high-beta” developing-nation currencies such as the rand. Deutsche Bank AG is advising investors to short the South African currency against the Russian ruble.
South Africa riots may blow over, but the damage to rand is done
In the debt market, yields on the most-liquid 2026 government bond climbed five basis points to 7.49%. The country’s risk of default, as measured by credit-default swaps, headed for its biggest jump since June 23.
The FTSE/JSE Africa All Share Index slid as much as 0.8% on Monday, before erasing losses on gains in major stocks that benefit from weakness in the rand. Global luxury retailer Richemont provided the biggest boost to the market.
Although investors are used to the nation’s political volatility, South Africa is at risk of seeing economic growth of less than 4% year-on-year because of the intensity of the unrest, said Annabel Bishop, chief economist at Investec Bank Ltd.
“While these losses are faced by the private sector, the volatile situation, if not rapidly brought under control will impact investor sentiment soon and destroy the hard-won gains in the Ramaphosa presidency if it approaches civil war,” Bishop, who is based in Johannesburg, wrote in a note.