Well-off individuals and companies seeking to safeguard their wealth tripled their dollar deposits to Sh88.1 billion in dollars in the nine months to November last year when Kenya’s economy was in a Covid-linked slump and the shilling weakened steeply against the greenback.
Latest data by the Central Bank of Kenya(CBK) shows that the value of dollars stockpiled in banks crossed a record Sh714 billion in November compared to Sh625.9 billion in February just before the country reported its first case of Covid-19 infection on March 13 —triggering restrictions to curb the spread of the virus.
The value of the dollar deposits between February and November 2020 represents a 219 percent leap when compared to a similar period of the previous year when the equivalent of Sh27.63 billion was banked.
It means companies and individuals banked nearly Sh10 billion in dollars monthly between February and November last year, up from an average Sh3 billion in a similar window of 2019.
The huge dollar deposits in the midst of economic turmoil show that businesses and wealthy Kenyans sought a safe haven for their wealth in the wake of uncertainty.
High-net worth investors and companies traditionally tend to hoard their cash during difficult times rather than invest it to chase returns. Some companies also build huge reserves as buffers instead of borrowing.
“There has been a gradual accumulation of hard currencies as locals seek to make deposits or hold their money in the form of the different currencies due to uncertainties,” Churchill Ogutu, head of research at Genghis Capital said.
“There has been a sentiment towards the hard currencies as a safe haven, hence driving the huge pile-up.”
The wealthy also tend to shore the value of their money in dollars when anticipating rough economic tides like the one currently being witnessed from the effect of the coronavirus pandemic.
Kenya’s economy suffered a steep GDP contraction of 5.5 per cent in the second quarter of 2020 before partially recovering to a slump of 1.1 per cent in the third quarter, helped largely by elevated agricultural production and construction works.
Demand at home and in export markets slumped as consumers stayed indoors to avoid catching the virus and because of government containment measures, forcing firms and the rich to freeze investments plans.
Apart from depressed demand at home and in export markets as consumers stayed indoors to avoid catching the virus, the shilling took a beating against the greenback.
The shilling lost ground against the dollar in November, declining 1.1 percent from 108.8 at the beginning of the month to close at 110 units, which helped boost the value of dollar holdings.
“The Kenya shilling depreciated marginally against major international and regional currencies during the week ending November 26,” the CBK said in the weekly bulletin at the time.
The CBK said 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 expected decline, those holding dollars would be able to later convert their money to shillings at a gain or would not suffer conversion losses when importing.
They were proven right as the shilling shed more than nine percent to the dollar since the start of the year due to reduced inflow of dollars from portfolio investments, tourism receipts and imports as a result of the impact of the pandemic.
Analysts are of the view that the rush to buy dollars is part of a global trend in response to the rapid spread of the coronavirus, which has sent investors to the safety of the greenback.
In times of trouble, all sorts of companies, banks and investors want to hold dollars. It is the world’s reserve currency and considered the safest.
The dollar has become the currency of choice for worried investors because the US economy is seen as the most sheltered should the virus damage the global economy.
The rush to the dollar has also been pushed by flight to safety, with the sharp decline in Kenyan stocks market which tanked to a 17-year low as foreign investors rushed to sell off their exposures in emerging markets, wiping out billions of paper wealth of local investors.