• The rand was trading at around 14.56 to the dollar on Thursday afternoon, having started June below 13.75.
• With protests now in their seventh day after Zuma handed himself in to police to serve a 15-month jail term for contempt of court, 72 people have died and more than 1,200 have been arrested.
• "Zuma's imprisonment was the spark that ignited the protests, but underlying issues such as rampant unemployment, widespread inequality and discontent with Covid-19 related restrictions are the powder keg," said Aleix Montana, Africa analyst at risk consultancy Verisk Maplecroft. 

The South African rand has depreciated rapidly as the government prepares to deploy more troops, amid widespread violence following the arrest of former President Jacob Zuma.

With protests now in their seventh day after Zuma handed himself in to police to serve a 15-month jail term for contempt of court, 72 people have died and more than 1,200 have been arrested, according to a police statement Tuesday.

Around 5,000 troops were already on the ground as of Wednesday, with riots and looting concentrated in the densely-populated Gauteng and KwaZulu-Natal provinces. The government is now hoping to deploy 25,000 South African National Defence Force personnel to quell what President Cyril Ramaphosa has called unprecedented violence. 

The rand is now catching a breather after ceding its position as the year's top emerging market currency and dropping to its lowest level against the dollar since April. The rand was trading at around 14.56 to the dollar on Thursday afternoon, having started June below 13.75.

"Zuma's imprisonment was the spark that ignited the protests, but underlying issues such as rampant unemployment, widespread inequality and discontent with Covid-19 related restrictions are the powder keg," said Aleix Montana, Africa analyst at risk consultancy Verisk Maplecroft. 

"The currency was barely affected when Zuma was imprisoned last week, since it was seen as a welcome move to fight deep-rooted corruption. The fact that the Rand has weakened markedly in the face of the unrest indicates that investors didn't see the protests coming and are concerned about the direction of travel." 

Verisk Maplecroft's Civil Unrest Index characterized South Africa as "high risk" in the third quarter of 2021 with a score of 2.77/10.00, making it the 13th worst performing country in sub-Saharan Africa. 

It expects the ongoing violence and business disruption to further erode the country's performance in the next iteration of the index, with South Africa likely to tip over into the extreme risk category. 

Between a rock and a hard place

If indeed the unrest is centered on a broader discontent with the current weakness of the economy, this could hinder the government's ability to implement austerity measures and restore its debt position to a more sustainable path, according to Capital Economics Senior Emerging Markets Economist Jason Tuvey. 

The violence also comes on the heels of a reintroduction of strict Covid-19 containment measures, as the country battles a rapid rise in cases. As such, the extent of the economic hit will be difficult to extrapolate from the expected short-term slowdown in activity, Tuvey suggested, adding that the most significant spillover effects may pertain to South Africa's fiscal position. 

"The public finances were in a poor state heading into the Covid-19 crisis and, while the impact has not been as severe as initially feared, the budget deficit still came in at 11.0% of GDP in the last fiscal year and debt ballooned to 78.8% of GDP," he said. 

One of the key tenets of the government's stern austerity measures was a three-year public sector wage freeze. However, with GDP still 3.7% below its pre-virus peak in the first quarter and the unemployment rate climbing to more than 30%, a deepening civil unrest could give further bargaining power to trade unions in public sector wage negotiations. 

"The key risk is that the unrest prompts trade unions, which are at the bedrock of the (ruling ANC party's) support base, to push for further concessions from the government," Tuvey said.  

"In so far as the unrest has highlighted the deep splits within the ruling party, President Ramaphosa may feel compelled to compromise in order to keep the unions on side ahead of next year's ANC leadership elections." 

However, he added that there is limited scope for the government to temper its austerity plans without provoking a backlash from investors, which would drive up local currency bond yields and exert further downward pressure on the rand.