Interest Rate Parity - A Strange issue of SGDMYR

[taylorjr94]

Most economic students would learn about Interest Rate Parity theory, so I decided that it was worthwhile to analyse how the SGD : MYR Exchange rates vs SGD : MYR Interest Rates behave

1. Source Date : SGD:MYR Exchange rates : https://www.bnm.gov.my/exchange-rat...nm_exchange_rate_display_portlet_quotation=rm
2. Interest rate : World Bank Deposit Interest Rate : https://data.worldbank.org/indicator/FR.INR.DPST
3. So, the theory is that SGD1, at SGD Interest rates, should be worth more than MYR1.9 (at 1997)), at MYR interest rates.
4. Result of analysis here:

   https://imgur.com/a/rDccWIV

Explanation of the computation :

I assume one keeps RM1.9 in MYRFD, and compounded it over the last 23 years, vs SGD1 at SGDFD and compounded it over the last 23 years. Why RM1.9 to SGD is because that's the exchange rate at 1997 (aka same amount of money both sides)

First interpretation:

SGD interest rates reported to World Bank is abnormally low. At these interest rates, keeping money in MYR in MYR FD would be worth more than keeping SGD in SGD FD, because even with the devalued exchange rate, the MYR is worth more converted to SGD.

The results didn't make sense to me. There's clearly something wrong with the SGD deposit rates because it's

 

[ckmervin]

@taylorjr94 As a developed country + regional financial hub + tax haven, SG can keep their interest rates low and YET still have net money inflow to the country (due to booming net exports + demand for services in SGD etc). This appreciates the SGD currency. During 2010-2020s, Singapore doesn't have to raise interest rate to lock demand for SGD, there is already enough demand domestically or internationally.

Developing, less stable countries can set interest rate however high they want, but it doesn't mean their currency will appreciate if the international community doesn't believe you (see Turkey, Argentina).

US current fed interest rate of 5.5% is not that high compared to a lot of countries's interest rate, yet they enjoy a net inflow of money demand due to an unprecedented level of trust and confidence in the currency. SGD enjoys a similar status , their currency strength moves in par with the US currency even though their interest rate offered (3.5%) is a whole 2% lower than US fed rates. Money is not flowing out domestically from SG, international investors are still snapping up and oversubscribing all Singapore's bonds offered at a "mere" 3.5% rate. Investors understand you have to pay a premium for safe investment, hence Singapore has no lack of buyers for her bonds and borrowings.

Meanwhile, in Malaysia, people has a much lower confidence on MYR and is bleeding money domestically, leading to a weaker MYR currency at the moment.

 

[taylorjr94]

@ckmervin Totally understand the macro aspects. As far as I know, MAS has been holding back the SGD appreciation (I believe one of their circulars said so, so SGD has some room to run). MYR is also not a freely traded currency so naturally there's downward pressure on MYR Demand.

The question I have is mainly the deposit interest rates. Singaporeans must be putting their money elsewhere, because

 

[ckmervin]

@taylorjr94 anywhere you like except FD. no one stores SGD in banks, because as you said, the FD interest rates are pathetic.

Some put into CPF (risk-adverse people). Others probably put in stock markets, either locally or overseas. It is very easy for Singaporeans to invest into overseas stocks due to their advanced financial systems.

 

[taylorjr94]

@ckmervin

It is very easy for Singaporeans to invest into overseas stocks due to their advanced financial systems.

From your knowledge, most of these monies go to SPY/VOO/VWRA?

Because if you have SGD, i think there are very few currencies that will maintain value against SGD. JPY/AUD/EUR all lost value against SGD.

 

[ckmervin]

@taylorjr94 since 2015, currently, most people who have excess SGD and doesn't have the appetite to invest in risky stocks will buy SSB (Singapore Savings Bond).

Most people I know of now will buy SSB, T-Bills if their SGD money is not in stocks.

Im not sure what happens before 2015 on where people put their money...

 

[taylorjr94]

@ckmervin

Most people I know of now will buy SSB, T-Bills if their SGD money is not in stocks.

Interesting. I should look into that. Thanks.

 

[jacquiepenny]

@taylorjr94 MAS isn’t holding back SGD appreciation. It’s clear to see they’ve been actively soft-pegging SGD against the USD throughout most of hawkish 2022-2023. USD rise, SGD rise.

 

[redeemedsinner]

@taylorjr94 Wait till you find out how Singapore heavily intervenes in their currency value. They have a big room of traders to buy and sell foreign currency at will to stabilise the SGD or even push it higher. Wild.

 

[hazelhope]

@taylorjr94 Not sure what you are trying to do here.

Interest rate parity just means that there is no arbitrage opportunity by investing in a country that has higher interest rate because the future exchange rate (at inception) should adjust to offset any additional gains.

It cannot predict future interest rate or future exchange rate.

 

[taylorjr94]

@hazelhope Yep thats the theory, but markets are hardly efficient, especially controlled and low volume ones like myr:sgd

 

[ineedadvice101]

@taylorjr94 Nothing strange. Central bank set interest rates low so FD rates low. During that time MY FD rate also like 2% only?

At these interest rates, keeping money in MYR in MYR FD would be worth more than keeping SGD in SGD FD, because even with the devalued exchange rate, the MYR is worth more converted to SGD.

MY FD rate just slightly higher than SG but devaluation of MYR to SGD much higher. If you were correct, you would not see a mass exodus of MYR to SGD. To this day still the same thing, many Malaysians change MYR to save in SGD to protect against devaluation even though MY FD rate higher.

 

[taylorjr94]

@ineedadvice101 Actually, based on the above data, the recent SGD appreciation is just a 'catchup' to the prolonged mismatch in the two currency's interest rate differences.

At SGD1 : RM 3.5, the rate of return of SGD is barely equal to the long term MYR compounded interest rate.

 

[ineedadvice101]

@taylorjr94 I think you should run some math and show us how you come to that conclusion. Cannot be everyone dumb and you the only smart person.

 

[taylorjr94]

@ineedadvice101 Please refer to attachment in the main post. Working has been indicated.

 

[zrcalo]

@taylorjr94 OP don't get triggered. I read your attachments and found it quite interesting and easy to understand.

 

[ineedadvice101]

@taylorjr94 Don't really have time to go through your spreadsheet and check it out for you. Why don't you share it in a concise manner? I seriously doubt anyone else going to look through your spreadsheet.

 

[troubledautisticsinner]

@ineedadvice101 Maybe you should quit reddit if you don't really have the time

 

[ineedadvice101]

@troubledautisticsinner Maybe grow a brain before posting. Never mind you don't even have anything constructive to add on.

 

[troubledautisticsinner]

@ineedadvice101 You merely stated a fact that everyone knows that MY currency is devaluing as compared to SGD. How is that constructive?