THE ERA OF INVESTMENT HAS BEGAN START NOW Time to invest your savings in the money market September 12, 2013 by Ugodre Obi-Chukwuu (ugodre@googlemail) Leave a Comment Ugodre Obi-Chukwu Ugodre Obi-Chukwu | credits: File copy Did you know that the Nigerian economy today is even more favourable to savers than to borrowers and spenders? This is not a regular occurrence and as usual benefits those who take advantage of it. Why do I say so? Saving is always better than spending when interest rate is high and above inflation rate. This is because borrowers get to pay a higher interest to lenders. Therefore, in an environment where interest rates are high it is better to save or invest in the money market than to borrow, particularly if the borrower is the government. The government borrows money from investors periodically to help finance its expenses such as salaries and overheads, and projects such as road construction, provision of other infrastructure, health care delivery, etc. Why does government have to borrow to finance these expenses you might ask? Well, government, like every other business venture, faces cash flow gaps. It receives income from taxes, sale of crude and dividends from its investments. However, there is a cash flow mismatch because the income might not come early enough to offset the expenses that have fallen due. Based on that, it borrows money to bridge the gap. How does this then favour a saver? In an economy where interest rates are currently high and at double digits, it is not unexpected that the government will also have to pay a high yield if it is to compete for your money alongside other capable borrowers such as banks. The Government borrows from you via FGN Bonds and issuance of Treasury Bills. FGN Bonds and TB’s currently attract double-digit interest rate whenever they are offered to the public. Contrast this with the United States or other Western economies where rates are at an all time low. Over there, now is the best time to borrow and spend. Unlike developed economies where reverse is the case, the high interest rates regime in Nigeria is a compensation for the effect of demand and supply, high inflation and other associated risk. As such, if you are a frugal saver who spends rather wisely you are more likely to benefit immensely when interest rates are high like they are now. As with other investments, government debts do possess some risks, albeit smaller than its alternatives. Greece for one is an example that is why it is important to remain informed about what happens around you locally and internationally. Benchmarks such as the country deficit to GDP or Debt to GDP ratios are useful tools that can be used to determine how risky Government borrowings are. A debt to GDP ratio of about 60 per cent, for example, can be considered risky in my opinion. Despite this, government hardly defaults on debt payments. Treasury bills and FGN Bonds are by far the safest investment you can find in the country at the moment. They also offer some of the best and most competitive yields around providing a stable and steady stream of income. The latest Treasury bill auction for example was sold for 11.5 per cent interest rate whilst FGN Bonds attracted a yield of about 13.5 per cent. Even an investment in real estate and shares can hardly provide the type of yields TB’s and FGN Bonds earn barring capital gains. Even at that the safety net it provides off sets the gains you derive from investing in shares. For savers looking to save for retirement or vacation or school fees or wedding etc. investing in some of these instruments can be quite beneficial. For example, a Treasury bills purchase of N1m for one year at 11.5 per cent will earn you about N115, 000 in tax-free income. The CBN also pays the interest upfront. Other money market instruments such as fixed deposits, call accounts etc. are also available alternatives. However, unlike FGN Bonds and TB’s they carry a higher risk yet pay lower comparative yields. However, a good investor may like to diversify his portfolio by having some investments in fixed deposits as well. Fixed deposit rates are probably likely to inch higher following the decision by the CBN monetary policy committee to increase cash reserve requirement for banks holding Government funds. As such, they will have to look for more deposits from savers in the private sector and incentivise them by issuing higher interest rates on deposits. This all augurs well too or savers. Now, this won’t last forever as market corrections typically occur over time. The question is whether you want to join when the party is almost over or when it is just getting warmed up. The government will not continue to pay interest rates this high and someday rates may crash too. I don’t know when this might be but if you are looking to save or have some loose cash now is not the time to save it in a low interest yielding account. Make your money work for you like they say. Even banks that help us save our money invest part of it in the money market because they know it pays. What you should not do is allow your loose cash to remain idle. Cash is king!
Posted on: Thu, 12 Sep 2013 16:32:42 +0000
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