Tuesday March 11, 2008

Singapore : Inflation erodes away bank savings

businesstimes.com.sg :

Cash-rich Singaporeans averse to risky alternatives are in an unhappy spot of having their savings eroded by inflation. Not only is inflation clearly on the rise - it hit a 26-year high of 6.6% in January - banks are further cutting their already miserable deposit rates. Last week, DBS Bank slashed its fixed deposit (FD) rate again to 0.9% for a 12-month deposit of $1 million. The latest revision is less than half of the 2.02% it offered on Jan 2. And OCBC Bank's 12-month FD rate has been lowered to 1.2% from 1.4-1.8% last year. This is for amounts between $500,000 and $1 million.

Despite the paltry returns on deposits, those with spare cash appear to have few choices beyond the safe haven of banks. Typical interest rates for savings and demand deposit accounts are 0.3 per cent. Interestingly, bankers said that generally, people with excess cash don't seem to be using it to pay down loans such as mortgages. Some observers reckoned that money is left in savings and demand deposits accounts while people mull the choices of higher returns elsewhere. Bankers said that customers are asking about higher-yield products, though caution seems to be the order of the day. Some of the more gung ho are venturing into foreign currency products.

- This is a clear and present threat to investors and savers who put aside money for a rainy day, only to see these savings get eaten alive by high and increasing rates of inflation. Savers are in fact being punished for putting money aside. What is the point of saving money at a 1% fixed deposit rate or worse, a 0.25% to 0.3% savings account interest rate, when the inflation rate as reported by the CPI figures is running at 6.6% a year?

Not long after the SIBOR rates fell to 1.5%, seemingly in tandem with the timing of the Fed rate cuts, Singapore banks started slashing their interest rates on deposit accounts. I watched in horror as the interest rate on my Fundsupermart FSM Cash Fund, an investment fund that consolidates investors' money into a consolidated fixed deposit pool, fell from 2.5% to 2%, and then down below 2% and down to today, where it stands at a pitiful 1.483%.

I have since pulled out some of that FSM Cash Fund money and put it to work in Canadian income trusts which give me a yield of 12-15% per year, or over 1% per month. I am receiving dividends from my personal share of their oil and gas production to the tune of several hundred dollars a month. And as inflation takes off and oil prices continue to set new records, either the dividends or the share prices of these oil & gas companies will increase, or both. I cannot recommend them unreservedly, however - prices are volatile, do not have 100% correlation with oil prices, and are subject to country, currency, sector, and company risk. It is perhaps not a problem for peakoilers like me who study the subject of energy obsessively, but it may not be for those who do not understand anything about the energy markets. Caveat emptor.

See also :

1. Singapore CPI inflation hits 6.6% in Jan 2008 - a new 25-year record high
2. Singapore SIBOR interest rates fall to 1.5%, lowest since Dec 2004
3. Singapore economy stuck in mud : inflation rising, M3 falling, GDP crashing - the stagflation formula

(2008-03-11 13:22:38 SGT) [Biz] Permalink Comments [1]

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