Sunday, 28 May 2023

Why Singapore's Interest Rate Remain Low and a Way to Earn More Interest?

I have seen a few articles covering Singapore's low interest/T bills rate. There are a few reasons why these rates have remained low and will likely remain at such levels for the next few years (venture a guess it could be for the next 3-5 years)

High Leveraged Society on Real Estate

Look no further beyond Singapore's property market. The market is in a buying overspree mode, with people leveraging heavily to buy multiple properties in hopes of profitting from it

The overbuying of properties help spurs Singapore's GDP as the construction industry overbuilds ahead of population growth. While the government is aware of the overleverage, it has sought to minimise interest rates hikes that kills property investors. This is because a higher interest means it is more difficult to service debt obligations, foreclosure happens and this will trigger a downturn of prices which causes margin call among property investors. This will freeze Singapore's banking sector via a domino effect. Hence it is important currently to keep SORA (the SIngapore's offical benchmark) rates low to prevent it.

The pace of SIngapore's interest hikes (SORA) is only 60% the pace compared to the US mortgage industry.

With the ever appreciating SGD, investors have parked their cash here with no complains of the low interest rate. This is because the appreciation of SGD against their foreign counterparts helps to earn a few percentage in "extra interest". Take for example the Japanese Yen and Korean Won, SGD has appreciated by 6-10% in a year. Japan and Korean investors would have profitted from such movements. It is the appreciation of the SGD where foreign investors are earning and not from the SGD deposit rates.

Outside of US Interest Rates are Still Low

Singapore's 3 month SORA is at 3.6%

The 3 month Euribor (Europe Interbank) is at 3.7%.

China's Prime 3 month rate is at 3.65%. 

Hong Kong 3 month Interbank is 4.63%. 

Japan's 3 month TIBOR is 0.08%

Only the US is at the 5-5.25% range.

Singapore might be slightly lower but it is not totally far off from the rest.

What Can We Do Living in Singapore?

Given the low (but not so low) interest rates, strong Sing Dollar, I have been considering to exchage some Sing Dollar into foreign currency deposits.

Among UOB and other local banks, USD foreign deposits are at highs of 4.9% 

There is an opportunity to aribitage where if one is able to change SGD into USD/HKD at money changers at Raffles Place Arcade Exchange, deposit in our local banks in the stated foreign currency, the returns is higher vis a vis a Sing dollar deposit. 

The current spread at Arcade from the offical FX rates are about 0.2%, so a 2 way conversion means you lose 0.4% in spread. This still netts a positive 0.7%. Do note you are subjected to foreign exchange risk if the Sing Dollar keeps appreciating non stop, like as present.

I am not sure if the method of changing foreign currency at Raffles Place Arcade and then depositing the currency as FD at a bank branch in Raffles Place is allowed. 

For readers, if you are aware it is allowed, please dispense your advice on how it works. I am sure many will be grateful for this advice to earn more interest in the low interest rate Singapore environment.

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