Markets and the rand remained stable during the Zuma arrest protests on the weekend, but failure to stop these protests in their tracks could in the long run be bad for the South African economy.
The rand and the markets also did not react to the arrest of Jacob Zuma on Wednesday night.
Prof. Jannie Rossouw from the Wits Business School said on Friday that the rand and the markets did not move because it was expected that Zuma would be arrested.
However, failure to arrest him would have made the rand and the markets fall, which would have damaged investor confidence.
According to a recent IMF Working Paper, The Response of Financial Markets to Social Unrest, published in March 2021, social unrest, such as large protests, riots, or other forms of civil disorder and conflict, has become a major concern for financial market participants in recent years.
The paper quotes a Wells Fargo/Gallup survey from 2017 that showed that investors ranked conflicts and political climate as top threats for investment climate, as market participants become concerned about the potential economic and financial consequences of social unrest.
The study determined that an average social unrest episode causes a 1.4 percentage point drop in cumulative abnormal returns over a two-week event window, which becomes more pronounced if the social unrest lasts longer and if it happens in emerging markets. In this case South Africa already ticks one box as an emerging market.
Stopping the unrest in its tracks will ensure that we do not tick the second box as well for unrest that lasts for too long.
According to the researchers, stronger institutions and specifically better governance and more democratic systems, mitigate the adverse impact of social unrest on stock market returns, giving a hint to what government should be doing now.
The researchers also warn that social unrest has broad implications on macroeconomic outcomes and policies and the pandemic intensifies the socio-economic fault lines such as economic and racial inequality that will likely sow the seeds for future unrest.
South Africa had previous times of unrest that affect the rand and the markets, such as the FeesMustFall protest in October 2015, the anti-foreigner riots in September 2019 and the anti-Zuma protest in April 2017.
South Africa also saw the other side of the coin in February 2018, when Zuma stepped down.
Another example was the firing of Nhlanhla Nene as minister of finance in December 2015. The rand fell to a record low of just above R16/$ and the country lost R5 billion. The fall was only stopped when Zuma appointed Pravin Gordhan as finance minister.
When Zuma lost the ANC leadership to Cyril Ramaphosa in December 2017, the rand strengthened to its best position in four years.
It is very important that government acts against the protesters now, showing better governance and democratic systems that work and that the unrest is stopped as soon as possible.
This is the only way we can keep investor interest and confidence. South Africa cannot afford to lose investors now.