When inflation causes savers to lose money

When inflation causes savers to lose money

This is one of the devastating effects of inflation, both for individuals and institutions. Savers who place their money in banks see their assets eroded, regardless of the investment instrument.

According to the latest data from Bank Al-Maghrib, passbook accounts, the most popular instrument, pay at a rate of 1.05%. The nominal rate is positive, but the real rate of return is negative, inflation causing the currency to lose value. With an inflation rate of 5.3%, as the Central Bank predicts for the year 2022, the money placed in the savings accounts will give a negative real return of -4.25%! For an investment of 10,000 dirhams made in early January, a saver’s portfolio will be worth 9,575 dirhams at the end of the year, i.e. a loss of 425 dirhams.

The situation is less catastrophic for those who place their money in term deposits, the rates for savings certificates being a little higher than for savings accounts. Still according to Bank Al-Maghrib, 6-month cash certificates currently pay 2.04%. The 12-month cash certificates provide a nominal yield of 2.62%. The loss in value of savings placed in DAT is less, but the damage is there, and it varies between -3.26% (6-month cash certificates) and -2.68% (12-month cash certificates ).

But this is only the hidden part of the iceberg, as a banker pointed out to us, because the bulk of private individuals’ money is made up of demand depositswho produce no yield. There, the loss due to inflation is dry: -5.3%, not counting the commissions and fees charged by banks on the management of checking accounts…

“The situation is indeed unprecedented. Clients do not realize this, because this concept of real rate of return is quite complicated to grasp by ordinary mortals. But it must be said, savings are losing value today. But at least those who have the reflex to put their savings in DATs or in savings accounts limit the loss a little,” explains our banker.

On the capital markets, the penalty is double!

So much for bank savings which remains, as a fund manager contacted by Médias24 pointed out, insignificant compared to institutional savings which is the main driver of public savings in Morocco. Here, we are talking about pension money, life insurance, UCITS, long-term savings entrusted by individuals or investors to institutions or fund managers.

Again, the damage is enormous, regardless of the compartment where the money is placed. “Most institutional savings are placed in the bond market. And this is experiencing major disruptions with portfolio yield rates close to zero or even negative, to which must be added the loss in value due to inflation,” underlines our fund manager.

The UCITS performance index, published weekly by the AMMC, gives the extent of the damage: a face return of 0.64% for money market funds; 0.64% for short-term bond funds and -0.7% for medium and long-term bond funds.

The situation on the stock market which often acts as a refuge or performance relay for investors in the event of a drop in the interest rate market is even more complicated. With a MASI showing a performance since the beginning of the year of -10.58%, funds invested in equities show a performance index of -5.07%. Ditto for diversified funds (composed of a patchwork of bond, money market and equity securities) whose performance index is also in the red: -2.16%.

To these face rates of return close to zero and negative is added this inflation of 5.3% which further increases the losses.

Mistrust and lack of visibility behind the big crash

Cause of this damage on the bond and equity market: the crisis and its effects on the budget and investors’ expectations. “Since the crisis, everyone anticipated a budget slippage which would push the Treasury to intensify its exits and its fundraising on the Treasury Bonds market. This created upward pressure on Treasury Bond rates, systematically generating a drop in the value of assets and portfolios. The Treasury has tried to reassure the market by talking about the budgetary margins it has, but people still do not have confidence in the future. We live in a lack of visibility which means that trust has disappeared. Those are these expectations of market participants on the Treasury deficit, as well as inflation which pushed rates up, with the supply of BDTs rising considerably,” explains our asset manager.

And nothing reassures the market, even the commitment of the Treasury to raise 40 billion dirhams on the international markets (including bilateral and multilateral competitions). “There is a big gap between what the Treasury says and market sentiment. Conditions on the international market are deteriorating with the end of accommodating monetary policies in the United States and Europe and the rise in interest rates. It is not really known whether the Treasury will make this exit or not. And even if he makes this exit, the pressure on the offer on the local market will remain very strong, ”underlines our source.

This situation of low yield, and inflation projections, has created a kind of panic in the market, our source tells us, prompting many savers to redeem their shares in UCITS. This made things even more complicated, forcing managers to sell their assets at very low prices.

“When you go out on the market to liquidate securities, you don’t find buyers, especially for medium- and long-term securities (5 years and more). No one wants to commit to long maturities. As a result, we are forced to accept price discounts just to have cash and honor the exits of our customers. And the only buyers left are the institutional investors who are taking advantage of the situation,” explains our fund manager.

Institutions limit damage to pension money

Market makers, institutions, pension funds, insurance companies, provident organizations are indeed trying to limit the damage as much as possible.

First taking advantage of the rise in bond rates, which was very fast, according to our market source. “Rising rates are a good thing for institutions, since all the new cash they place is on much better terms than in December,” says our source. The evolution of the yield rates of BDTs and bonds allows institutions to grab a little yield.

13-week bonds saw their rate drop from 1.40% at the end of December 2021 to 1.77% currently. Over the 52 weeks, the rates fell, over the same period, from 1.60% to 1.77%. The trend is even more marked for 5- and 10-year securities. The former saw their rate drop from 2.35% at the end of December 2021 to 2.95% currently. The yield on 10-year securities rose from 2.35% to 2.95%.

This certainly does not counteract the devastating effects of inflation on the value of money and savings, but with these increases, the institutions were able to limit the breakage a little and salvage what could be.

And this, knowing that an institutional does not make its calculations over a year. “When we talk about negative real returns, we are only talking about the year 2022. Institutionals do not think on such a short term, since they all have a large stock of old securities at very high rates. The reasoning is thus based on the weighted average rate of return on the portfolio and not solely on the investments made over the year. The impact of inflation, if it is temporary as Bank Al-Maghrib predicts, will thus be very minimal on pension money »explains our fund manager.

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