Financial markets' response to SA's week of violent unrest has been surprisingly muted, with analysts suggesting hardened emerging-market investors aren't that concerned as long as there is no threat to President Cyril Ramaphosa's leadership and that SA doesn't resort to authoritarian tactics to crush the violence.
But rating agencies have warned that the riots pose risks to SA's economic recovery from the Covid pandemic and could complicate efforts to fix public finances and implement reforms.
Economists are slashing their growth forecasts for this year, with the more pessimistic going to 3% or less. They are sounding the alert, too, on the risk to inflation from the disruption of supply chains - with this week's monetary policy committee meeting likely to be closely watched.
The rand lost about 3% to trade at R14.70/$ on news of looting and violence in KwaZulu-Natal and Gauteng early in the week, but by Friday evening had lifted to R14.41. The JSE was briefly pulled down by losses in retail, property and bank stocks on Tuesday but jumped later in the week, helped by mining stocks. Government long bonds responded only briefly to the crisis.
Anchor Capital joint chief information officer Nolan Wapenaar said on Wednesday the rand had weakened by 2.5% over a period in which the dollar had strengthened by 1%. "From your desk in London, the positive was that under all the pressure the rule of law had prevailed. From an investor perspective we are an emerging market and emerging markets are supposed to misbehave from time to time," Wapenaar said.
"The headline we can't have is 'Ramaphosa installs apartheid-era police tactics to quell uprising' - he has got to take a firm but measured approach and that is what we are seeing."
Absa investment strategist Mamokete Lijane said the fact the government and ANC had allowed the judiciary to prevail in the case of former president Jacob Zuma going to jail was seen as very positive. In an emerging-market context, riots are not unheard-of, and SA is seen as having the most coherent and sensible leader in emerging markets at the moment. "The investment community really likes Cyril," Lijane said. "It's regime change they are worried about and there is no suggestion that South Africa has seen the beginning of regime change."
Ratings agency Moody's vice-president Aurelien Mali said the unrest is likely to prove costly in property damage and weigh on economic activity. It illustrates the high social risks to SA's credit profile, Mali said.
Moody's lead sovereign analyst for SA Lucie Villa said in a report: "The evolving situation is likely to have knock-on effects for consumer, business and investor confidence. Together with a rise in coronavirus infection rates in May and June, this poses downside risks to our forecasts of 4% GDP growth this year." Growing social tensions will make it difficult for the government to contain spending, and complicate efforts to restore the health of public finances, the report said.
Fitch Ratings recently revised its growth forecast for 2021 up from 4.3% to 4.9% and said in a report this week it assumes the unrest will fade soon "with only transitory macroeconomic effects", and the direct economic impact on SA's creditworthiness will be limited. However, though SA's record on political stability is reasonable, "the violence underscores the risk that exceptionally high income inequality and unemployment could jeopardise social and political stability over the medium to long term".
Economists diverge widely on their growth forecasts for this year, with PwC this week saying the unrest could put 50,000 jobs at risk and revising its growth forecast down to 2.3% for this year, which is 1.4 percentage points lower than a month ago.
At the other end of the spectrum, Old Mutual chief economist Johan Els had a 5.5% forecast, which he said this week might need adjusting down to 5%, but he is not changing any forecasts just yet.
Deutsche Bank economist Danelee Masia pointed out that KwaZulu-Natal, which is feeling the brunt of the situation, is a systemically important province accounting for 16% of GDP, while Gauteng contributes a further 35% of GDP. She said growth could go as low as 3% this year given the damage.
Intellidex head of capital markets research Peter Attard Montalto has lowered his forecast from 3.8% to 3.1% but kept next year's growth rate at 2.7%.
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