Sunday, October 26, 2008

A fair rate of return

Hi Mr. Tan,

Investors in Singapore have no real safe alternatives to park their money and get a fair return if they don't want any risk. So, what is a fair return for keeping money safe? My feel is that, the return should at the very least offset inflation.

However, for far too long, savings/fixed deposit rates at banks here are ridiculously low. The last time I checked, POSB/DBS, fixed deposit is at around 0.45 percent to 0.75 percent, for most people, of course, depending on amount & tenure. This can hardly offset inflation that is much higher, 5 to 6 percent.

The Singapore government has long pursued a strong SGD to fight inflation. The trinity of inflation, interest rates & foreign exchange is supposedly linked by the PPP, purchasing power parity. However, for the short term PPP may not hold and distortions can persist for years. So, with our recent SGD weakening, we would see higher SGD interest rates instead ?

Some of my friends even suggest that the the Singapore government providing long running subsidy for local banks. Just consider this, local banks take in funds from depositors at less than 1 percent rate, and then invest in Singapore Government Securites, which depending on tenure, can yield up to 3.6 percent. Banks have to hold a certain amount of SGS anyway, as stipulated under MLA requirement from the central bank, MAS.

So, assuming 3 percent spread on say, 300mil, that's 15mil, almost risk free for the banks!

Regards