South Africans hoarding R1.7 trillion cash – which comes with a risk

Household deposits in banks in South Africa exceeded R1.7 trillion in 2023, but holding cash comes with some risk.

This is according to PSG Wealth head of sales Nirdev Desai, who said the word ‘cash’ includes assets that range from short-term deposits – 15 days’ notice – to bonds with longer-term maturity dates – typically 10 to 30 years.

He described these investors as “sitting on the sidelines of the market” by holding cash reserves while waiting for better investment opportunities. 

He pointed to data from the National Treasury showing that household deposits in South African banks exceeded R1.7 trillion in 2023.

This is about three times higher than the norm since the inception of this measurement, and this trend can also be observed in global markets.

“Warren Buffett of Berkshire Hathaway wrote in his latest annual letter to investors that they’re struggling to find good investment opportunities and are sitting on piles of cash themselves,” Desai said. 

“When these are the words of arguably the most respected value investor, it’s a good indicator that many others will be sitting on cash – waiting for better opportunities to invest in growth assets when the time is right.”

He said if investors intend to include cash holdings in their portfolios, it is critical to acknowledge that cash is not always a failsafe option.

In addition, guarantees are – at best – only as good as the word of the guarantor. Therefore, it is important to understand these risks and how to mitigate them.

Desai listed a few prominent risks as being associated with holding cash as an investment.

Single counterparty risk

It is typical for a bank to lend to the market against its own book. This book comprises, amongst others, deposits invested in the banks by investors.

Therefore, the risks associated with investments with a single counterparty, such as a bank, are that investors only get exposure to the quality of the book lent out by a single institution.

The investments are, therefore, linked to lenders’ ability to pay back their loans and the institution’s ability to manage these obligations sustainably.

Risk of defaults

While cash assets offer less market volatility than equities, they also carry the risk of defaults and ‘haircuts’—reductions in asset value. 

Several banking institutions have come under the spotlight over the last few years, both locally and abroad, for the risk linked to their deposits.

One of the larger banks in the US, Silicon Valley Bank, defaulted in 2023, and 13 South African banks defaulted in the 30-year period before 2018.

“Defaults are not as rare as many investors may think,” Desai warned.

Protection 

Desai said investors have some protection against these risks. For example, if a bank defaults or is unable to cover its liabilities, its ability to pay depositors back is stressed, and depositors will have to negotiate terms to get their deposits back. 

Locally, the South African Reserve Bank’s Deposit Insurance Scheme offers backing for depositors, but this insurance is limited to R100,000 and is claimable on a case-by-case basis.

Desai advised investors to make sure they hold cash for the right reasons to protect their investments.

“It is wise to hold some cash for emergencies, and a prudent guideline for this is three times your monthly income,” he said. 

“Surplus cash reserves should be diversified appropriately to mitigate exposure to single counterparties and to achieve exposure to different kinds of cash assets, such as negotiable certificates of deposit and different grades of debt.” 

He said PSG Wealth believes it is prudent to allocate less than 7.5% of your investment exposure to a diversified portfolio of cash.

He said cash for emergencies and any other known liabilities should preferably be invested in a transactional facility.