The quiet quandary among savers lately is finding opportunities that provide good returns. Basic bank deposits --- although more for parking funds than outright investing --- now have near-zero returns. Some banks require a minimum outstanding balance for the depositor to even qualify for interest. For those that still offer some interest, the lowest that I have seen is a rate of about one-tenth of one percent and this is still taxable at 20 percent withholding tax.
At this rate, your monthly return for an outstanding balance of P50,000 comes out roughly to about P3.33 --- an amount small enough to miss out among your transactions but big enough to be a nuisance if you try to balance your books before you get your printed statements. The other way of looking at this interest rate is that you have to set aside and keep untouched a balance of P400,000 in your account so that your net interest affords you a small-sized serving of French fries from a popular burger franchise every month.
Rates on government securities (GS) are not as low as what they were a few quarters ago. One-year GS was at 5.26 percent at the recent primary auction and based on the corresponding PDS Treasury (PDST) Reference Rate for this tenor the net return would just be a shade under 4.5 percent. The catch is that GS is usually bought in lot sizes that are thought to be beyond the reach of the average Juan Dela Cruz investor.
All of these bring people to consider commodities.
Many have looked into precious metals, jewelries and timepieces. At lower levels of interest, the bet is that the intrinsic value of these precious commodities would appreciate faster than any interest-bearing instrument. On net then, this would be a quiet gain, a play of shrewd arbitrage if you want. The problem is liquidating the investment.
A pawnshop is always an option, but always the last. You better have friends or relatives willing and able to buy these commodities from you. Otherwise, you are either limited to a fire sale (selling at very low prices and thus the high likelihood of a loss) or be stuck with a precious but otherwise illiquid asset.
After all that comes real estate. Again just like precious metals and stones, the traditional view is that land does not depreciate. I am not sure that this is still universally the case, especially in our country where an organized readily accessible Luzon-to-Mindanao land valuation system remains a work-in-progress. Of course, real estate taxes never adjust downwards but that is not the same as having market values always in the owner's favor.
The low interest rate regime makes people seriously think about building homes or commercial establishments. Over the weekend, for example, a very close friend asked my opinion if a 10-year fixed-rate housing loan would be good at this time. As I was writing this piece, a relative from across the seas surprised me with a phone call because he wanted to bring home his US savings in order to build --- to be funded partially by a bank loan --- a commercial unit related to tourism and hospitals. In both of these cases, the underlying stimuli are low interest rate; lower cost of borrowing in the former and low nominal returns on US assets in the latter.
The proper answer to the two phone calls has to be: “It depends”. When you compare the current interest rates to higher rates of years past, taking a mortgage at this time would look better. But we really cannot borrow today and ask for the lowest rate that existed at some point in the past, can we? Instead, it still has to be --- and will always be --- the comparative cash flows (amortization versus income stream) over time that ultimately matter.
All things the same, many would be attracted to fixed-rate mortgages at today's rates. But just make sure though that you have done your homework with the numbers. Is your expected income sufficient to cover the amortization? How much of an increase in the amortization can your income tolerate? At what loan rate can your income stream handle at the maximum? If rates do go down, can you advance payments? Will there be a penalty? How about pre-termination of the outstanding loan amount? If currency conversions are involved, by how much will the cost-benefit analysis be sensitive to exchange rate movements? What does this mean for the timing of the conversion of the funding as against the timing of the revenue stream?
These are not questions that are readily answerable without considering specific contract provisions from specific possible lending institutions. But answering these right now is not my point.
All I wanted to say is that the low interest rate environment brings challenges for savers. But within these challenges, there is still a point to saving and we just have to figure out the specific means.
For planning one's retirement, the low interest rates remind us the value of saving consistently and saving early. If you have P1,000 saved every year at a modest 3 percent, doing this for 25 years --- starting at age 30 years old up to 55 years old --- will mean a future value of about P36,460. But if you started 10 years earlier, your future value increases to slightly over P60,460. That is a 65 percent increase for starting to save at age 20 years instead of 30 years old.
For government securities, market rates for 25 year GS is over 8.0 percent. That isn't bad, assuming though that you have the minimum amount required and have the patience to go with it.
Beyond that, there are also non-traditional opportunities with low interest rates. Personally, I don't see the liquidity in precious stones and timepieces but that's just likely my ignorance of this market. One gets a clue though when someone gives you a name-brand watch and tells you to take care of it so that you can hand them to your children in due time. (So was this a gift really for you or your kids?). Then there are dwellings and commercial ventures in real estate. We like the idea of fixing our rates for very long periods, avoiding the volatilities of annual repricing, but somehow I am almost sure that we will surely fret if rates actually fall.
In the very end, there will always be a thin line between gains and losses and between challenges and opportunities. The final resolution of these still remain a case-to-case situation.
As my friend said, “Okay, I should ask the details”. Absolutely.
ASK DR> NOET
(Have a question for Dr. Noet? Email personal_finance@inquirer.net.
(Noet Ravalo is a macro-financial economist by practice and profession. He was chief economist of the Bankers Association of the Philippines until 2002 and has since been doing consulting work. Since 1994, he has been asked to provide technical inputs to both the Senate and the House of Representatives on various economic and financial legislation, some of which will have big impact on Filipinos' personal finances.)
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