Eurozone crisis hits Kenyan pension funds

Retirement fund managers sold off more than two-thirds of their offshore assets in the second half of last year as the worsening European crisis deepened fears of a collapse of the euro currency.

Latest data from the Retirement Benefit Authority (RBA) shows that offshore investments dropped by Sh10.5 billion in six months to Sh5.2 billion in December.

The European debt crisis has heightened fears of a collapse of the eurozone and its common currency.

“In an effort to recover some of the losses in the local market and take advantage of the unprecedented decline in the exchange rate that occurred in October 2011, some managers liquidated offshore assets resulting in a sharp decline in their offshore position and an increase in cash positions,” said the RBA chief executive Edward Odundo in a report. The sharp decline of the shilling in the second half of last year also prompted some fund managers to sell off their offshore holdings to book gains from the weak currency.

“Though the eurozone crisis began earlier, concerns started filtering into the market at around this time, investors liquidated their positions to take advantage of the weak shilling to invest locally for higher yields,” said Einstein Kihanda, the chief investment officer at ICEA Lion Group.

In the second half of last year, the shilling spiralled downward touching an all-time-low of 107 units to the dollar in October. To stop the depreciation of the shilling, the Central Bank of Kenya (CBK) increased interest rates so as to attract foreign inflows, further making it more profitable for fund managers to sell their offshore portfolios.

Fund managers who held huge amounts of cash found it easy to bargain for high returns from banks which were in need of deposits. The banks were paying deposits of up to 30 per cent to wholesale depositors.

Returns on the 91-day treasury bills also rose to over 20 per cent, as the CBK sought to woo international investors to boost foreign currency inflows.

Investments in fixed deposits went up to Sh21.9 billion from Sh20 billion, while their cash holdings went up by Sh1.8 billion to Sh6.8 billion.
The euro crisis has also been blamed for a slump of the equity markets as economic gloom in Kenya’s largest export destination has meant lower demand prospects for Kenyan goods.

The pension industry assets declined 7.9 per cent to Sh432.8 billion.

“The sharp decline in industry assets was driven by short-term volatility including the steep drop in the Nairobi Securities Exchange during the period as well as the sharp rise in interest rates on government securities which resulted in a drop in the value of the lower yielding securities already held by the industry,” said Mr Odundo.

The value of investment in quoted shares dropped by Sh30 billion in six months to Sh93 billion from Sh123 billion in June. A sample survey of pension schemes by Alexander Forbes showed that the industry had a weighted average return of negative 9.9 per cent in December 2011 compared to 27.8 per cent in 2010.

The drop in asset value by the national fund, National Social Security Fund (NSSF), was much higher at 13.7 per cent being almost double the industry slump. NSSF assets declined to Sh97.9 billion from Sh113.5 billion.

Mr Kihanda said that it was now prudent to focus on long-term returns as that there were still uncertainties in the short run.

The shilling, though having stabilised, is still considered to be under pressure needing constant intervention from the Central Bank while interest rates are still high. Investors are also cautious of the upcoming elections.