Wealthy Kenyans and companies stockpiled a record Sh33.8 billion in two months in fixed bank deposits in the wake of withdrawals from dollar-based accounts and search for safety for their savings.
Central Bank of Kenya (CBK) data shows that fixed bank deposits held by Kenyans hit a historic high of Sh1.567 trillion in May, up from Sh1.533 trillion in March.
Deposits in foreign currency bank deposits—which jumped at the peak of the Covid-19 pandemic—dropped by Sh34.6 billion, suggesting the rich were shifting their savings to the local currency fixed accounts that are currently paying an average return of 6.3 percent.
Analysts say the switch was triggered by the strengthening of the shilling against the dollar, which has reduced the appetite to put money in foreign currency with the hope earning both bank interest and capital gains.
SAVINGS IN FIXED ACCOUNTS
The savings in fixed accounts, which have increased by Sh165 billion since the onset of Covid-19 in Kenya in March last year, is an indication that the wealthy are protecting their value and hedging rather than seeking new areas in which to invest their fortunes amid the economic fallout from the pandemic.
“The expected external inflows that were due beginning April and throughout the end of the second quarter were seen bolstering the shilling and depositors who anticipated this strengthening of the Shilling reduced their US dollar holdings,” Churchill Ogutu, head of research at Genghis Capital, said.
The Kenya shilling strengthened against the dollar as the market basked in healthy inflows via sale of government debt and new financing from the International Monetary Fund.
The shilling traded at an average of Sh107.42 in May per dollar, up from Sh109.73 in March and Sh110.59 in December.
The shifts followed the IMF’s approval of a new $2.34 billion financing package for Kenya in early April.
The strengthening of the shilling happened in a period when savings in foreign currency has dropped from a high of Sh779.7 billion in March to Sh745.1 billion in May.
INVESTORS HOARDING DOLLARS
The CBK said earlier that bankers and firms had informed it via a poll that investors were hoarding dollars for speculation purposes in the wake of forecasts showing that the shilling would remain weak against the US currency.
With the shilling stable and stronger, investors are shifting their savings to fixed deposits.
“The decline in dollar deposits shows more confidence in the underlying strength of the Kenya shilling, especially due to the recent financing deal with the IMF,” Ronak Gadhia, the director Sub-Saharan Banks at EFG Hermes, said.
Cash in circulation remained flat in the two months to May, reflecting the shift from dollar accounts to fixed deposits.
A slowdown in business activities and the uncertain future caused by the virus have forced many companies and rich investors to hold onto cash, leading to a pile-up in bank accounts.
Uncertainty at the stock market and a slump in real estate have also seen the rich opt to keep cash in banks and tap interest returns.
The performance of Kenya’s economy in 2020 was hit by the effects of the Covid-19 pandemic and restrictions that were put in place to contain its spread, forcing many businesses to close and send their employees home or subject those retained to pay cuts.
Firms have shelved expansion plans under the current economic setting, pushing them to keep funds in fixed accounts awaiting full recovery of the economy.
KENYA’S ECONOMY PICKING UP
Kenya’s economy has been picking up after likely posting a slight contraction of 0.1 percent in 2020, the IMF said.
The IMF forecast a sharp swing to growth of 7.6 percent in 2021 and 5.7 percent in 2022, but said Kenya continued to face challenges returning to durable growth, and its past gains in poverty reduction had been reversed.
While companies see the money in banks as a buffer against hard times, it has long riled investors, who say executives should invest it for growth or return it to shareholders.
Nearly a third of about 400 businesses surveyed in the monthly Stanbic Bank Kenya’s Purchasing Managers Index (PMI), conducted by UK researcher IHS Markit, said they planned to resume investment in business growth over the next one year.