SIM Report: A week of violence in South Africa has dented the macroeconomic outlook and damaged investor confidence

sim report: East & southern africa, issue 13

SOUTH AFRICA: A week of violence has dented the country’s macroeconomic outlook and damaged investor confidence

Calm has returned to much of KwaZulu-Natal and Gauteng provinces after nearly a week of widespread riots, looting, and vandalism in the country’s two main commercial hubs: Johannesburg and Durban. South Africans and businesses located in the country are slowly picking up the pieces from the violent unrest that was triggered by the jailing of former president Jacob Zuma on 9 July. However, the longer-term damage has already been done.

Counting the costs

Estimating the true costs of the unrest remains difficult. The government on 22 July elevated the death toll to 276 people, with police investigating about 168 suspected murders. The commercial implications of the extensive disorder have been significant and broad. The government estimated on 21 July that 40,000 businesses, large and small, had been impacted and that the total cost to the economy would reach about ZAR50 billion (USD3.39 billion). This is far lower than calculations provided by financial institution Rand Merchant Bank, which estimated potential losses to ZAR200 billion (USD13.5bn).

Retail operators have been most severely impacted. The South Africa Property Owners Association (SAPOA) said that approximately 800 of their members’ stores were looted and/or severely damaged, while 100 malls sustained significant fire damage. Around 200 shopping centres, 100 malls, and at least 1,300 ATMs, and 300 banks and post offices were vandalised in KZN, alone. In total, about 150,000 jobs are now believed to be at risk.

Longer-term impacts

While the unrest primarily affected Gauteng and KZN, it struck the heart and arteries of the South African economy. Both provinces account for about half of the country’s GDP. Although the situation has largely normalised in Gauteng, there are concerns that heightened political tensions and inter-communal animosity, caused by the unrest, will prolong the risk of further unrest in KZN over the coming months. Such tensions are already being capitalised on by some of the country’s main opposition parties, notably the Marxist black empowerment party Economic Freedom Fighters (EFF), whose leader Julius Malema has issued diatribes against the provinces’ Indian community due to its members’ role in establishing community-police checkpoints and allegedly discriminating against some Black South Africans. These tensions are likely to remain flashpoints for further unrest ahead of and following municipal elections scheduled for 27 October. A possible delay to the polls, as the Independent Electoral Commission (IEC) recommended on 20 July, may fuel anti-government suspicions and hostility over the coming months. Both the EFF and the conservative Democratic Alliance party have stated their opposition to any delays.

Furthermore, the authorities’ clearly inadequate and slow response to the level of violence has likely scared companies with operations in the country and deterred those considering market entry. While the extent of the unrest was difficult to foresee, there were clear indications that unrest was likely to occur, and the authorities should have been better prepared if South Africa is to be perceived as a serious investment destination. We warned at the end of June that protests were likely over Zuma’s legal proceedings, particularly in KZN and Gauteng.

Highlighting investor concerns, Toyota South Africa Motors (TSAM), the local subsidiary of Japanese automaker Toyota Motor Corporation, on 15 July sent a letter to eThekwini Municipality, which encompasses Durban and suburbs, requesting an action plan and roadmap for recovery to which the local government responded on 20 July. TSAM has since said it was pleased with the response, but it is highly likely that further uncontrolled unrest will undermine the authorities’ credibility and trust among investors. In turn, this may lead to a suspension of expansion plans over the coming six months.

Such risks need to be assessed against the backdrop of the COVID-19 pandemic and the third wave of infections which has swept the country since the end of June; it is probable the widespread unrest and complete lack of adherence to COVID-19 lockdown restrictions will have undermined recent strides in bringing the number of infections down. Should that prove to be the case, this will undoubtedly prolong the commercial impact further.

Finally, a marked surge in insurance claims by the more than tens of thousands of affected businesses will create huge bottlenecks for insurance companies underwriting damages due to civil unrest and protests. Claims are likely to take a long time to assess, delaying any payments that would facilitate businesses to recover once the lockdown restrictions are lifted.

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