You have worked hard to make money and now you want to park some of it for a while and get it working for you. Not unnaturally you would like to seek out the best deals on interest rates.
Now if I told you that one very popular deal is currently offering an interest rate of minus 0.75% per annum you probably wouldn’t read any further. So I won’t mention it. Or at least, not until later.
Would 20% to 50% in 8 days interest you?
Now that sounds far more interesting than minus 0.75% but where can you find such an offer? Probably on your mobile phone as I did. I wasn’t actually looking for it but it came in as an unsolicited SMS. It had a website link that I checked out on a separate computer only to have it blocked by my anti-virus software. There was also a local number that I didn’t ring as that might register my own number as a potential customer and have my number sold on to database hunters. On Googling the company name another website popped up with a serious health warning about the company. Clearly I had not been singled out as a privileged investor.
Perhaps we should settle for 10% per annum?
Disappointed, I let that offer go but my luck was in. An expat client based in Bali sent me an offer he had received by e-mail following a cold call (now banned by the way in many countries). The offer consisted of an annual interest rate of 10% with capital guaranteed. No details were offered and the website gave sparse information. Much of our industry went down this road a decade ago when similar offers turned to dust in the wake of the Global Financial Crisis of 2008/9. At that time people were drawn to such investments since:
1) they offered steady returns – frequently around 10% per annum
2) they offered capital guarantees by way of secured assets
3) returns were not correlated with the stock markets that had been savaged in the financial crisis.
The secured assets included commercial properties, student accommodations, forestry investments, insured litigation cases, even life insurance policies. So what went wrong? When credit dried up, the banks were in disarray; people were losing their jobs and homes and everyone needed cash. They needed to quickly withdraw money from their investments but found that the cash had run out, the banks had recalled their loans and the assets had plummeted in value amidst the many panic fire sales. Some post-crisis fund failures were due to mismanagement or fraud. Products offered by banks are usually very safe but when Lehmann Brothers collapsed the structured notes they had issued became worthless.
The moral? A promised return of 10% per annum or more must be treated with great caution.
There is no such thing as a ‘guaranteed’ investment
Or at least, unless you add ‘to the extent of the security of the assets underpinning the guarantee’. Even the sovereign country of Ireland was forced to add this disclaimer when it guaranteed deposits to shore up confidence in its banking system which was on the fringe of collapse in 2008.
The correct terminology to use is ‘protected’ rather than guaranteed. Governments perhaps are the exception as they can indeed guarantee their deposits provided they have control over their currency (which Ireland in the Eurozone did not). US Treasury Bonds for example are among the ‘safest’ of investments but currently pay only 1.5% to 2% per annum. And they are guaranteed only in the sense that in a dire financial crisis the government could print as much money as they liked to honour the debt. So you would get your money back but its purchasing power could be decimated.
In short there is no completely risk-free return in real terms.
Why do deposit rates vary so widely?
Many people have said why leave money in the bank in USD, Euro or GBP at little or no interest when you can get 5% to 6% in Rupiah in an Indonesian bank. The answer is that interest rates reflect the relative risk. When the Rupiah is stable, a Rupiah deposit account is perfectly fine, especially if you have regular outgoings in Rupiah. But when the USD is rising sharply against the Rupiah you may find a zero return in USD is more valuable than a 5% return in Rupiah. If you are an expat living in Bali it would make sense to hold a certain amount of Rupiah but it would also be wise, based on historical currency movements, to hold longer term money in USD or the currency of your home country, especially if you plan to return at some point.
If you are looking for the best rates locally, the same principles apply; there is a direct relationship between risk and return. This applies to all investments. You are likely to find a higher rate is offered by the smaller banks. This is because it is harder for them to attract funds than the larger banks. But in order to make a margin of profit for themselves they have to charge higher rates to borrowers.
Their customers will often include those who are unable to borrow from the big banks. These loans will therefore tend to be at greater risk of default. In a very bad situation the ‘non-performing’ loans could break a bank. With prudent management the risk is low but it is there and it explains the higher rate of interest. You may rightly point out that the government guarantees deposits to a certain limit (as do most governments). But from past experience the recovery process can be slow and arduous.
So where is this minus 0.75% interest rate?
The answer is in the ‘safe haven’ country of Switzerland. Many investors are nervous about the multiple threats to financial markets including Donald Trump’s trade wars, threats to peace in the Middle East, risks to oil supplies, indicators of a coming recession in the US, economies under pressure in Europe, Brexit etc., etc. Consequently many are seeking a safe haven for their cash. Gold is one beneficiary. It pays no interest and is costly to hold but it does offer the potential to rise in value in times of economic or political upheaval. The other traditional safe haven is the Swiss Franc. But Switzerland does not want to see money flooding in that it does not need, hence the minus rate of interest to stem the flow.
Of course it doesn’t make sense to leave your money on deposit at negative rates for the long term. Eventually the capital would disappear altogether! However, this is an option available to those who want to preserve at least part of their capital in times of stress.
Long term investors should not be influenced by all the ‘noise’ but remain focused on the positive long-term movements of the stock markets where real wealth can be built. Short term needs are different, and accepting a minus rate of interest is likely to be a much safer bet than the 20% to 50% return in 8 days that may pop up on your phone.
Colin Bloodworth, Chartered Member of the Chartered Institute for Securities and Investment (UK), has spent over 20 years in Indonesia. He is based in Jakarta but visits Bali regularly. If you have any questions on this article or related topics you can contact at : firstname.lastname@example.org or +62 21 2598 5087.
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Copyright © 2019 Colin Bloodworth