Anna has a 30-year-old single daughter gainfully employed, living with her, but not adding to living expenses. No need to worry about home purchase or payments -- their house and lot was bought with her late husband, as with a condo in Makati now rented out for P50,000 per month. At least the P34,000 net after tax from the condo rental would lighten the monthly P100,000 needed for sustenance and maintenance of a middle-class lifestyle in Makati City. As she grows older, though, the P100,000 per month might have to be P150,000 to include the additional health costs and other needs. And they say 3% average annual inflation doubles the costs of goods and services every 20 years -- by the time Anna reaches 80, survival costs might be P300,000 per month!
Economists warn that if inflation should start to rise above the interest rate being earned on savings, the real value of the investment begins to erode as the money loses value faster than the interest rate compounds it. The rule of thumb has always been that the inflation rate should be at least equalled or preferably bettered by the after-tax yield from savings and investment products within the corresponding time-frame of placement.
But inflation is hard to predict in the long term and difficult to measure in the short term. Long-term inflation is suffered post facto of government monetary intervention in the economic necessities of the short term. Short-term inflation is usually sparked by food prices and medium-term inflation is usually driven by severe fluctuations in the supply or demand of some key commodity, like the steep increases in the price of oil in the 1970s and 2000s.
The Bangko Sentral ng Pilipinas (BSP) reported that inflation increased to 4.9% in July this year from 4.4% in June, mostly due to the 8.2% rise in food prices in July. Inflation has frothed dangerously to the upper rim of the BSP target range of 3%-5% annual inflation, a constraint to the targeted gross domestic product (GDP) of 6.5% to 7.5% for 2014.
Panic! To stay even, you must invest at rates of return that at least match inflation rates. Keeping your money under the mattress is a non-option, even Anna knows that. But even just being aware of the indissoluble bond between investment and inflation immediately brands one as risk-averse, else why add additional layers of unforeseeable events or external human intervention to impact yields on an investment?
Speculative stocks and corporate bonds, even blue-chip equities with dividend streams, could be low-priority for a risk-averse investor like Anna, who would have liquidity as an added requirement to security of capital. The financial products to address her needs would be government securities, bank deposit products, trust funds or similar investment management pooled investments, but probably not the discredited managed mutual funds and other equities-loaded funds.
But the banks’ one-year time deposits earn only 1.275% to 1.375% per annum or a net after tax of 1.02% to 1.10%, well under the 4.9% inflation, or an erosion of -3.80% to -3.88%. And the ultimate risk-free investment would be government securities, but do they beat inflation?
According to the Bureau of Treasury website, “Government securities (GS) are unconditional obligations of the State, and backed by its full taxing power, making them practically free from default.” Treasury Bonds (T-Bonds) mature in two, five, seven, 10 and 20 years, paying coupon interest quarterly on a per annum basis. Treasury Bills (T-Bills) mature in 91 days, 182 days or 364 days. These do not have coupons. Instead, they are sold at a discount from their face value, earning “interest” through the difference of the discount price and the face value paid at the maturity date.
Yet T-bills and T-bonds are the basic reflection of the BSP’s reading of domestic factors and unfavorable external developments which can bring down or raise the Philippine government’s costs of short-term borrowing. Last year in October, T-Bill rates fell to new record lows -- with the yield for the 91-day GS dropping to a mere 0.001% -- as the latest investment grade for the Philippines and the shutdown of the US government drove demand for the debt paper. In the interplay of supply and demand, the rate for the 182-day bills fell by 83 basis points to only 0.09%. The rate for the 364-day bills dropped to just 0.19% with P34.61 billion bids for the P10 billion being sold. Although the record-low rates made it tempting for the government to borrow more than its immediate requirements, the Treasury did not find the need to sell more bills than what was stated in the borrowing schedule. The government had sufficient liquidity, it was explained. The drop in the GS rates came after Moody’s Investors Service last week upgraded the credit rating of the Philippines by a notch, or from speculative to the minimum investment grade of BAA3.
That is well and good for government, and the common good of the Filipinos. But looking at the yields on GS going down to 0.001% versus inflation of 3%-4% would not be good for Anna. Even the BSP special deposit accounts (SDAs) now allowed to be retailed through banks and financial institutions yield only 1.8%. Anna would have to invest in fixed assets like real estate to hedge against inflation, but those are not easily liquefiable, and will starve day-to-day cash flows. And there’s the fear of a possible bubble burst, in the wake of investors rushing to real estate.
Can the BSP possibly explore inflation-indexed bonds, like the US Treasury’s Inflation Protected Securities (TIPS)? These savings bonds use a formula adding the rate of inflation to the interest rate, with regular re-computations to determine new interest rates. Their value is “guaranteed” against medium- and long-term inflationary cycles.
Give Anna and the middle-class investor-saver an option -- in the rough and tumble of today’s personal economics.
Amelia H.C. Ylagan is a Doctor of Business Administration from the University of the Philippines.
ahcylagan@yahoo.com
source: Businessworld
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