As violent unrest grips South Africa, economists warn that prolonged insecurity could threaten the country’s investment climate and cause further economic disruption amid a third wave of the pandemic.
Last week the jailing of former president Jacob Zuma sparked protests mainly concentrated in his home province of KwaZulu-Natal. By Tuesday protests had escalated into riots and looting across the country, including the commercial capital Gauteng and Durban, prompting the government to deploy the military in some provinces.
As the situation continues to deteriorate, the government has threatened rapid prosecution of those arrested and ‘community dialogues,’ triggering calls from the business community for a more heavy-handed approach.
“The cycle of wide scale impunity must be broken through overwhelming and rapid deployment of security force,” says Peter Attard Montalto, director of capital markets research at Intellidex, a South African research and consulting company.
“The scale of the number of looters in places like Soweto does not lend itself to normal riot policing.”
Footage filmed from a helicopter on Thursday showed the wreckage of a Johannesburg mall which was ransacked and set alight, while local residents allegedly carried off furniture, electrical appliances and clothes.
As outnumbered police struggle to maintain the rule of law in flashpoint areas, foreign investors are reminded of the recent ransom-taking of Richards Bay Minerals by a construction mafia, leading to the assassination of their general manager, Attard Montalto says.
With Pandora’s Box sprung open investors could take flight, he adds.
“Whilst there will be a short run economic impact our bigger worry is the negative impact this will have on broader FDI sentiment .
By Tuesday, 72 people had been killed in clashes with riot police, including 10 crushed to death in a looting stampede in a Gauteng shopping centre.
Traditionally seen as a safe-haven for foreign investors, the escalation of violence and ransacking of businesses has caught many off guard.
“This has clearly changed now and there is serious concern amongst FDI investors over the rapid deterioration in the situation on the ground in the last 24h,” says Attard Montalto.
“We are now having to assess a yawning set of downside risks that were always kept in a box and pushed out beyond the forecast horizon.
The scale of the economic impact could be mild, but depends on the length and severity of the unrest, says Jason Tuvey, senior emerging markets economist at Capital Economics.
“On balance, we think that this points to a modest slowdown rather than an outright slump in economic activity and, even then, this will mainly reflect the impact of the third wave of COVID-19 and tighter virus containment measures rather than the unrest,” says Jason Tuvey
Ongoing violence also risks disrupting critical sectors of the economy such as transport, mining and manufacturing sectors that tend to have particularly stultifying effects on the economy, he says.
With public finances in a poor state before Covid-19, the biggest spillover effect could felt in South Africa’s fiscal position.
Set on the backdrop of a tough lockdown amid a third-wave, a depressed tourism industry, and spiralling unemployment that has jumped to 30%, the unrest signals broader discontent with the economy, and could limit the government’s ability to push through austerity designed to put the public debt position back on to a sustainable path, says Tuvey.
“There have already been signs that the government is giving up some ground in wage negotiations with trade unions. But there is limited scope to water down the austerity plans without triggering a backlash from investors, which would push up local currency bond yields and put downward pressure on the rand,” he says.
The budget deficit rose to 11% of GDP in the last fiscal year, as debt has ballooned to 78.8% of GDP. Economic growth is still below its pre-virus peak in Q1 at 3.7%.