The rand continued to lose ground against the major currencies in morning trade on Tuesday (13 July), amid ongoing violence and looting in areas of KwaZulu-Natal and Gauteng.
It follows the arrest of former president, Jacob Zuma on July 7, to begin a 15-month sentence for contempt of court.
The currency lost in excess of 2% against the dollar in mid-morning trade on Tuesday, having lost 1.6% on Monday.
- Dollar/Rand: R14.54 (2.21%)
- Pound/Rand: R20.15 (1.90%
- Euro/Rand: R17.23 (1.99%)
TreasuryOne said that the continuation of Monday’s chaotic events could see the rand weaken further, with recovery hinging on restored order and calm.
In a televised address on Monday, president Cyril Ramaphosa condemned any act of violence that has claimed several lives. He described what was being witnessed as opportunistic acts of criminality, with groups of people instigating chaos merely as a cover for looting and theft.
“There is no grievance, nor any political cause, that can justify the violence and destruction that we have seen in parts of KwaZulu-Natal and Gauteng,” he said.
“We know the high costs of this violence to the property to livelihood and businesses. The loss of human life is the greatest cost of all,” he said.
Bianca Botes, director at Citadel Global, said that the violence and looting that has followed Zuma’s arrest will impact the economy.
“One cannot deny the chaos that has ensued since the recent incarceration of former South African president Jacob Zuma, which has now made headlines across the globe.
“On the one hand, many international investors consider his arrest as a positive development for democracy and a boost for business confidence, while others might regard the violent protests and looting as a deterrent.”
Botes noted that local opinion is often that the rand is driven by occurrences within our borders, whether economic or political. In reality, it is quite the opposite. Most of what drives the rand is based on global events and risk sentiment within the global financial market environments.
“Over the past few months, we have witnessed the significant recovery of the rand from the Covid-19 pandemic-induced lows which topped R19.30 in April 2020, however, this recovery is not attributed to events that have occurred within the country. Locally, South Africa still faces a dire economic trajectory, which was only worsened by the pandemic,” said Botes.
She said that it might come as a surprise to many that the arrest of Zuma, although a positive sign for local sentiment, has had no significant impact on the rand.
“In reality, Zuma’s arrest has 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 as to the effect protests and looting will have 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 add to the fragility of the local economy, Citadel said.
“While the national tension will bring negative sentiment, it will not be responsible for a dictation of the direction of the rand – it will merely be one of the factors contributing to it, among many others,” said Botes, adding that other local factors forex specialists will be closely monitoring is Eskom’s electricity supply and the ongoing local economic turmoil due to Covid-19.
Eskom on Monday appealed to all citizens to continue using electricity sparingly amid cold conditions in some parts of the country this week due to a cold front.
According to Eskom, it has not implemented load shedding since 13 June 2021 due to some improvement in the performance of the generation fleet and a system that is currently performing relatively well.
“However, the cold front will increase the demand for electricity, thereby putting pressure on the power system. Therefore, Eskom urges the people of South Africa to help reduce electricity usage in order to ease pressure on the system.”
Botes said that although emerging market currencies are trading softer, a risk premium has been built into the rand due to the unrest. As political tensions and riots have seen numerous economic hubs come to a standstill due to fear of looting, the rand will trade slightly softer against the dollar.
She highlighted the following global factors that will continue to drive the direction of the rand over the coming months:
- Global growth and inflation.
- The rising Covid-19 cases and its effect on the global economic outlook sentiment.
- Additional fiscal stimulus expected from US president Joe Biden.
- Monetary policy action by central banks, including but not limited to the Federal Reserve (Fed) and European Central Bank (ECB) interest rates and quantitative easing (asset purchases).
- Rising interest rates in the rest of the world will dampen the appeal of riskier emerging market assets.
“It is understandable that people are concerned about the consequences recent South African events could have on the rand, however, it’s important to remember that the global climate is currently just as fragile, and those global factors will be of more significance than recent events,” Botes said.
President Ramaphosa on Monday decried the disruptions that have prevented the sick from accessing medication from pharmacies, while food does not reach supermarket shelves, and healthcare workers cannot go to work.
In addition, he said the country’s vaccination programme has taken a knock, as the country battles the third wave.
“We will soon be facing a huge array of food insecurity and medication insecurity in a few weeks,” he warned.
“The path of violence, of looting and anarchy, leads only to more violence and devastation. It leads to more poverty, more unemployment, and more loss of innocent life.”
The National Security Council, chaired by the president, will meet twice a day to coordinate all measures necessary to restore stability.
“Let me be clear, we will take action to protect every person in this country against the threat of violence, intimidation, theft, and looting. We will not hesitate to arrest and prosecute those who perpetrate these actions and will ensure that they face the full might of our law.”
The president has called on everyone to commit themselves not only to peace but also to greater economic opportunity for all.
“We are emerging now from a long period of uncertainty and stagnation. We have witnessed the effects of corruption and the erosion of the State, the terrible consequences of the abuse of power and neglect of duty.”
He said South Africa rejects violence and chaos and will not be deterred from the task ahead.
“Together, we will defeat those who seek to destabilise our country, who seek to reverse the gains we have made. We will stand as one people, united against violence, unanimous in our commitment to peace and the rule of law,” he said.