The Impracticality of CD Laddering in the Philippines

I’ve read an interesting article at MonitorBankRates regarding CD laddering. If you’re not in the know, CD is short for Certificate of Deposit and is commonly referred as Time Deposit in the Philippines. A CD is somewhat similar to a regular savings account except that it has fixed terms and within the duration of the term, you can't make any withdrawals. Of course, there are exceptions but in general, withdrawal of funds is limited. Within the term you, as a depositor is guaranteed to earn fixed interest rate that's much higher than what’s offered in a regular savings account. Nowadays the common term is 30 days but some offer up to 5 years. This service is offered normally by banks and is a safe investment as your deposit is insured by the government through PDIC by up to 250,000 PHP per depositor.

The article at MonitorBankRates explains the concept of CD laddering which maximize returns from low CD rates currently prevailing in the US, averaging to just 2.0 percent this year compared to 5.0 percent a year ago.

CD laddering allows you to take advantage of interest rates on your money deposited over a number of months or even years. In the US, the trend is, the longer the term the higher the interest rates. For a one-year CD, some banks offer as much as 3.50 percent which is way above the average 2.00 percent. CD laddering involves dividing your savings into several “ladder rungs” and placing it in CDs, each with progressive terms. For example, if I have $30,000, I can divide this equally into 3 and deposit it into a one-year, two-year and three-year CD. After a year the one-year CD matures and each of the other CDs has one year less until maturity. In short, the two-year CD now matures in one-year; the three-year is two years from maturity. The money from the matured one-year CD is now invested again on a three-year CD. This technique is cyclic in nature and provides you piece of mind as your investment is spread across several terms and has high liquidity as you can access your money after the term ends. However to engage in CD laddering you must provide enough cash for emergency cases as most CD’s imposed penalties for early withdrawal. To know how much you can earn on a CD ladder, you can use this online CD ladder calculator.

However, at present this technique is not applicable in the Philippines. Unlike in the US where the longer the term the higher the interest rate, Philippines banks do not really encourage long term time deposits. As an example let’s consider PS Bank. One of the highest rates in time deposits is offered by PS Bank. On their website, for a deposit between 100,000 - 499,999 PHP, the rate for the 30 day term is 3.50 percent. For 60 days the rate is 3.00 percent and for 90 days its 2.75 percent. So as you can see, the rate is going down as the term goes up. Instead of encouraging investors to go long term, what happens is, they just cycle within the 30 day term, which makes CD laddering impractical here.

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