The impact of the riots on the rand
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ONE cannot deny the chaos that has ensued since the recent incarceration of former president Jacob Zuma, which has 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.
As South Africans, we are often of the opinion that the local currency will be dominated by events within our borders, economic or political in nature. 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 markets.
Over the past few months, we have witnessed the significant recovery of the rand from the Covid-19-induced lows, which topped R19.30 in April last year. However, this recovery is not attributed to events that have occurred within this country. Locally, South Africa still faces a dire economic trajectory, which was only worsened by the pandemic.
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 or not he remains behind bars, alongside global factors such as reflation, stimulus and global growth.
Despite this, there is a real concern over the effect the 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 certainly add to the fragility of the local economy.
Although the national tension will bring negative sentiment, it will not be responsible for dictating the direction of the rand – it will merely be one of the factors contributing to it. The other local factors that forex specialists will be closely monitoring are Eskom’s electricity supply and the ongoing local economic turmoil due to Covid-19.
Although emerging-market currencies are trading softer, a risk premium has been built into the rand because of the unrest. As political tensions and riots have seen numerous economic hubs coming to a standstill because of fear of looting, the rand will trade slightly softer against the dollar.
The following global factors will continue to drive the direction of the rand over the coming months:
- Global growth and inflation.
- Rising Covid-19 cases and their effect on global economic outlook sentiment.
- Additional fiscal stimulus expected from US President Joe Biden.
- Monetary policy action by central banks, including the US Federal Reserve and European Central Bank 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 that recent South African events could have on the rand. However, it’s important to remember that the global climate is just as fragile, and those global factors will be of more significance than recent events.
Bianca Botes is director at foreign exchange specialists Citadel Global.
* The views expressed here are not necessarily those of IOL or of title sites.
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