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Investor gains dip on jittery local market

By Dominic Omondi | July 27th 2020

Investors have been forced to take a huge haircut on their money following a volatile economic environment that has seen majority park their billions of cash in fixed deposit accounts and government securities.

Latest data from the Central Bank of Kenya (CBK) shows that cash in fixed deposits attracted a median return of 6.96 per cent in May.

This is the lowest since November last year, when they got an average of 6.56 per cent for the money they had stashed in banks.

It was not different for those who opted to put their money in government securities, with the 91-day Treasury Bill (T-Bill), a short-term government debt attracting an interest of 6.17 per cent, the lowest in seven years.

The last time interest rate for the 91-day T-Bill dropped this low was July 15, 2013.

After Kenya registered its first case of Covid-19, the stock market, another lucrative hunting ground for investors brimming with cash, was thrown into a tailspin.

Although the securities market has been gaining - recording some good activities after enduring a storm period punctuated with desperate sell-offs, it is yet to recover to its pre-pandemic levels.

On March 14, a day after Kenya announced its first case of Covid-19, trading at Nairobi Securities Exchange (NSE) was halted as traders desperately offloaded their shares, with the market capitalisation, or total wealth at the exchange, dropping by a record Sh120 billion.

“The rules allow us to halt trading if the NSE 20-Share Index declines by more than five per cent,” said Nairobi bourse Chief Executive Geoffrey Odundo.

The NSE 20-Share Index is the benchmark index, which includes 20 blue-chip stocks. The stock market has since stabilised, but the benchmark index is yet to hit its pre-pandemic levels of 2,600 points.

By the close of business on Friday, the NSE 20-Share Index was at 1,880.84 points, up by 0.15 per cent from 1906.43 points on Thursday.

Banks also got the lowest return from the deposits since September 2018. Interest spread, or the difference that remains by subtracting what they give as interest on deposits from what they get by lending out, narrowed to 4.91 per cent in April before it widened slightly to 4.98 per cent in May.

Nonetheless, banks, spooked by the uncertainty in the investment climate, have shunned the private sector and instead funneled most credit to government.

For example, the government’s long-term debt papers that were auctioned last week were oversubscribed by 302.9 per cent, with CBK receiving bids of Sh181.8 billion.

This was against an offer of Sh60 billion that CBK, Treasury’s fiscal agent, had announced for the five, 10 and 15-year Treasury bonds.

Over-subscription of Treasury bonds and bills comes at a time when highly liquid individuals and businesses have stashed their money into fixed deposit accounts.

Rather than lending this money to the private sector and households, banks have opted to pump it into government securities at low-interest rates.

For the three bonds auctioned, CBK will pay an interest of 11.66, 12.5 and 12.85 per cent for the five, 10 and 15-year tenors, respectively.

However, National Treasury Cabinet Secretary Ukur Yatani is optimistic that banks will begin lending to the private sector. “This will go on for a month or two, and then they (banks) will start lending to the private sector,” said Yatani.

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