How COVID-19 affected our savings

20.11.2020    Share +

How COVID-19 affected our savings

Today we all live, putting it lightly, in quite “strange” times. COVID-19 took the world by surprise and everyone’s day to day life changed significantly in the last 8 months and probably will never be the same for a long time to come. Everyone has his own story to tell, but have you wondered how this change influenced people’s financial lives, and more specifically – people’s saving behavior? Find out in the next lines from Georgi Buchevinov, Head of Deposits Management, in his insightful article for Forbes Bulgaria. 

 

Savings on the rise

Already more than 8 months into COVID and the related economic crisis and we now have enough financial data to give some clarity on this topic. The major trend – people started to save more, driven mainly by serious drop in consumption (e.g. almost no travel, less going out thus higher disposable income) and the uncertainty surrounding the post-COVID world to come (initial crisis “shock”, risk for future employment and the overall capability to generate income). On EU level for example, in EU area member states, the household savings grew in the first nine months of the year with 1.3% higher  compared to the same period in 2019(5.2% in 2020 vs 3.9% in 2019), or in other words – saving growth rate under COVID is 33% higher, proving that people save much more compared to last year’s less stressful times. The same trend is visible in many regions around the developed world – for example, the savings rate in the United States ( how much people save as a percentage of their disposable income ) hit a historic high of  33% in April - the highest for the last 60 years, more than twice as high compared to the second highest (17%) back in 1975. The increase in savings varies country by country of course, because of country specifics such as level of disposable income, economic measures undertaken by the governments, level of trust towards the governments and last but not least – the mentality of the savers. For example, German savers, a benchmark for proper “saving” mentality and high trust towards the system, barely changed their saving behavior compared to last year – saving for them remained “business as usual”. On the other side of the spectrum, Romanians increased significantly the dynamic of savings growth by a whooping 41% compared to the growth for the first nine months of last year (9.7% growth of household savings in 2020 vs 6.9% in 2019) .The increase is mostly driven by depreciation of the local currency, the high level of political and economic uncertainty in the country, rather low disposable income and lack of trust towards the undertaken economic measures.

 

The curious case of Bulgaria

Bulgaria is probably one of the very few EU-member states, where the savings growth is lower compared to the one from the previous year. In fact, for the first nine months of 2020, household deposits grew by 4% which is with 0.6% less compared to the growth for the same period in 2019. The most interesting part here is that the decrease in the savings growth rate is driven by a huge drop in end of first quarter, when COVID hit - people obviously panicked and started to stockpile cash on hand (0.9% growth in Q1 2020 vs 1.7% in Q1 2019). The second and third quarters of 2020 however demonstrated higher savings growth compared to last year – 3% growth for Q2&Q3 2020 combined compared to 2.8% for the same period last year, consistent with the overall trend in the EU member states. As mentioned, there are multiple drivers that explain this pick up in savings.

First, the imposed strict lockdown heavily restricted people to spend thus increasing their disposable income. Savers put their purchasing plans on hold (e.g., travel, purchase of cars, real estate, etc.), fearing what the future holds.

Statistics show, that the household deposits mass in Bulgaria is dominated by rather small tickets (BGN 6.1K on average), which explains the drop in savings in the beginning of the crisis  - the majority, people with limited amount of savings, preferred to withdraw money from the banks in order to have cash on hand and be able to cover their short term financial needs. The financial sector witnessed an interesting trend here related to people’s mentality – in times of uncertainty and economic downturn, one of the first things consumers did is to repay their obligations in advance, should they have the means to do so, of course. I believe this is a purely local, Bulgarian, mindset – similar behavior is not visible in our neighboring Romania for example.

As the crisis progressed into the second and third quarters, savings started to increase with uncertainty being the main driver. The lockdown killed many of small businesses cashflows which directly influenced unemployment rate. Risks regarding future employment and ability to generate income emerged. The economic measures undertaken by the government were rather slow and their efficiency was questionable – unemployment started to increase despite the measures, GDP plunged worse than the expectations, the allocated funds for mitigating the negative effects of the crisis were only partially utilized. All those facts made people sceptic about the future which made them to increase their efforts for stockpiling money – the “rainy days” for many are actually here and now.

 

Saving patterns

Regarding the type of saving products preferred - quick access to cash turns out to be paramount for people in times of uncertainty.  We noticed a trend for significant increase in the termless deposit types (e.g. saving and current accounts), which in general are the less attractive saving product compared to the term deposit because of the traditionally lower yield.  It turns out that people don’t care much about interest rates on deposits nowadays, which is understandable having in mind the historically low interest rate environment we’ve been living in the last couple of years, but put emphasis on the flexibility and convenience instead. And this is where purely digital financial solutions & distribution channels excel – COVID has been a huge accelerator of the penetration of digital saving.

 

What the future holds?

The world is slowly but surely getting back to “the new normal”, despite COVID’s subsequent “waves”, and we expect the same thing to happen with people’s savings as well. Once the economies get back to growth, savings will also continue to grow but at a more moderate pace, closer to the one in the pre-COVID years. The difference though would be that the share of “digital” saving solutions and the demand for flexibility/convenience both would be much higher and savers will go with the banks or other players in the financial industry that answer this demand.

 

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