- Stockpiled dollars hit a record Sh626 billion as investors rush for safe haven.
- The wealthy are protecting their value and hedging rather than seek new areas in which to invest their fortunes.
- Corporates and wealthy individuals are sitting on a cash pile worth Sh1.45 trillion in a soft economy in which investment options are becoming limited due to the restrictions imposed by the government.
Wealthy individuals and big companies have stockpiled dollars to record levels that have now hit Sh625.9 billion as investors seek safe havens for their wealth amid the risks caused by the coronavirus pandemic.
Central Bank of Kenya (CBK) data shows that foreign currency bank deposits held by Kenyans jumped by Sh14.7 billion in February to reach a historic high of Sh625.9 billion. This is an indication that the wealthy are protecting their value and hedging rather than seek new areas in which to invest their fortunes.
CBK says bankers and firms informed it via a poll that investors are hoarding dollars for speculation purposes in the wake of forecasts showing that the shilling would remain weak against the US currency.
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 outside China, which has sent investors to the safety of the greenback.
“It is part of a global trend and investors are preferring to hold cash when they are scared about future prospects,” said a currency trader at a bank who did not wish to be named for fear of reprisal from the regulator.
“Traditionally, the flight to safety takes majority of investors to the dollar, which is considered the best alternative investment in global markets”.
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. According to World Bank forecasts, sub-Saharan Africa’s economic growth for 2020 will contract because of the impact of the coronavirus, going into a recession for the first time in 25 years.
The bank’s Africa’s Pulse report said this year’s growth will be between minus 2.1 percent to minus 5.1 percent from 2.4 percent last year. The bank is also of the view that coronavirus will cost sub-Saharan Africa between $37 billion and $79 billion in output losses this year due to trade and value chain disruptions, among other factors.
A slowdown in business activities and the uncertain future caused by the virus has forced many companies and rich investors to hold onto cash, leading to a pileup of cash in bank accounts.
By the Easter weekend, the virus had infected more than 1.6 million people globally, resulting in over 101,000 reported deaths.
CBK in March polled banks and private firms in a market perception survey, which indicated that the shilling would decline further due to a cocktail of factors, including hoarding of dollars.
“Respondents cited lower export earnings, panic selling of stocks at the stock exchange, capital flight, speculative hoarding of US dollars and external debt obligations as reasons for the expected weakening of the shilling,” CBK said.
The regulator quoted the shilling at Sh106 against the dollar on Thursday compared to an average of Sh101.87 in January and February. A reduced inflow of hard currencies after the coronavirus outbreak has hurt the shilling.
Kenya has suspended international passenger travel and imposed a daily dusk-to-dawn curfew as well as banning public gatherings to curb the spread of the virus which had infected 197 people in Kenya by Easter Sunday.
Sectors such as tourism and horticulture, leading sources of foreign exchange and major employers, have already been hit hard by the ban on international travel.
The outbreak has also disrupted supply chains and local production. The Treasury last week said Kenya’s economic growth will slow down to three percent or less this year from an earlier forecast of 6.1 percent due to the effects of the virus.
CBK is yet to release March data on money in circulation and cash kept in banks, but effects of coronavirus began to be felt in Kenya from February through disrupted supply chains and reduced demand for farm exports.
Kenya’s economy was already sluggish ahead of the economic effects that came with coronavirus.
Analysts say high-net worth investors and companies with billions of shillings in fixed and foreign currency accounts have opted not to invest in expanding their businesses or starting new ventures, citing lower sales and returns.
The worth of foreign currency deposits have increased from Sh462 billion in February 2018, reflecting a growth of 35.2 percent — making it the fastest growing savings segment in Kenya’s banking sector.
Corporates and wealthy individuals are sitting on a cash pile worth Sh1.45 trillion in a soft economy in which investment options are becoming limited due to the restrictions imposed by the government.
Long-term and fixed deposits associated with the wealthy, money market funds and cash-rich corporates rose from Sh1.17 trillion in February 2018, reflecting a growth of 23 percent.
This ultimately had the effect of reducing the amount of money in people’s pockets and cutting circulation of cash outside banks and short-term deposits.
Low returns from a bearish stock market and a slump in real estate has seen the rich opt to keep cash in banks and tap from interest returns that stood at 7.06 percent in February.
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. However, with reduced demand, most have preferred to keep cash in banks with money in fixed deposits now equivalent to what the Kenya Revenue Authority (KRA) collects annually from taxes.