Malaysia's household debt problem

Malaysia household debt accounted for 81.0 % of the country's Nominal GDP in Dec 2022, compared with the ratio of 88.9 % in the previous year.

CEIC Data 

By ELIM POON

ECONOMY

Star Online Wednesday, 20 Mar 2024

PETALING JAYA: The surge in the country’s household debt level is symptomatic of broader systemic issues in the economy rather than isolated financial mismanagement.

While economists generally applaud the government’s efforts in promoting financial literacy among Malaysians, more comprehensive reforms are needed to get to the root of the problem.

Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said this is quite similar to the situation of low savings for retirement. He noted the fundamental cause lies in the low level of salaries and wages along with the high cost of living.

“This may entail implementing policies related to education, healthcare and infrastructure that will help our country to improve its productivity level. Clearly there are no shortcuts. 

“Therefore, it is a strategic imperative to enact economic reforms that will allocate the limited resources effectively, prioritising initiatives that improve our productivity.

“Financial literacy is like the first line of defence before households finalise their decision to take on more debt. 

“The measures to reduce household debt level should be a combination of financial literacy initiatives as well as efforts to contain the rise in the cost of living,” he told StarBiz.

The country’s household debt came to RM1.53 trillion by the end of 2023, with household debt-to-gross domestic product (GDP) ratio increased slightly to 84.2% compared with 82% in 2018. Housing loans account for the bulk of the household debt at 60.5%, followed by auto loans at 13.2% and personal loans at 12.6%.

For comparison, the total household debt stood at RM1.45 trillion in 2022, followed by RM1.38 trillion in 2021, RM1.32 trillion in 2020, RM1.25 trillion in 2019 and RM1.19 trillion in 2018. Between 2018 and 2023, the annual growth rate of household debt was 5.1%, with housing and automobile loans being the main drivers. 

On Monday, Deputy Finance Minister Lim Hui Ying, elaborating on the efforts and policies that the government’s efforts will undertake to reduce the country’s household debt ratio, said measures include the implementation of the policy document on responsible financing practices since 2012 and increasing the public’s financial literacy level through the Financial Education Network.

Other efforts entail encouraging households that decide to make substantial borrowings, such as purchasing a house, to follow the Credit Counselling and Debt Management Agency’s (AKPK) online financial education programme. 

Moreover, households facing financial management and debt difficulties are encouraged to seek advice and debt repayment restructuring services from banks and AKPK.

Source: CEIC Data

Referring to studies carried out by the Bank for International Settlements (BIS), Mohd Afzanizam said the current household debt level do warrant a cautious stance.

“The country’s highest debt-to-GDP ratio was at 93.1% in 2020. Prior to the Covid-19 pandemic, it was at 82.7% in 2019. BIS studies revealed that household debt above 80% might have a negative impact on GDP growth,” he said.

However, Mohd Afzanizam noted that household debt level should normalise as it was partly impacted by the recent government and private sector house-ownership incentives, along with the sales and service tax incentives for the purchase of motor vehicles between 2020 and 2022, which contributed to higher housing and automobile loans. Thus far, housing loans are the predominant factor in the country’s household debt.

Centre for Market Education chief executive officer Dr Carmelo Ferlito said the real emergency is household debt rather than home ownership, as home ownership is close to 80% while household debt-to-GDP ratio is about 90%.

“Obviously, you cannot push on home ownership without pushing on household debt and this is related also to the fact that during the Malaysian housing bubble from 2008 to 2013, home prices have grown much faster than wages and much faster than the average rate of inflation.

“With these conditions, the government narrative and the cultural pressure on home ownership surely translated into financial pressure, which probably led to financial decisions that are not always consistent with the actual financial conditions of households,” he said. 

On this note, Ferlito said while the government’s financial literacy initiatives are good, these are not long-term strategies.

He noted that in the long run, a growth strategy that would bring about social mobility and financial stability is needed. Furthermore, such a long-term strategy needs to be centred on the promotion of entrepreneurship and investments and on the creation of added value, he said.

“There needs to be a more holistic reform for an investment-led economic growth by having an ecosystem that is conducive to investments, both foreign and domestic. 

“Malaysia’s current growth model is based on consumer spending. Based on the economic data in 2023, private investment represents just around 15.5% of GDP while private consumption is almost 61%,” he said.

Source: Star Online April 20 2022 

Meanwhile, Sunway University economics professor Yeah Kim Leng said as long as banks maintain prudent lending standards and sound risk management practices, especially in minimising subprime borrowers, the high household debt level is not too worrisome.

“Equally important is that the economy is able to sustain real income growth, low unemployment, stable prices and low inflation to avoid interest shocks that could inflict financial distress to the household sector.

“As the country’s GDP grows, the debt-to-GDP level will decline in tandem as long as household loan growth is not excessive. Banks therefore would need to shift their lending focus to business loans to increase profitability, rather than compete excessively for consumer loans,” he said.

While the household debt figure may appear alarming, Yeah said total household assets is a multiple of total debt, hence allaying size concerns. “While sustainable at the aggregate level, the vulnerabilities lie at individual household’s financial capacity and systemic impact of economic shocks,” he said.

Yeah added that with high household debt, policy focus needs to be directed at increasing wages and income levels of the vulnerable groups while simultaneously promoting savings and prudent spending. Moreover, he said consumption-led growth would need to come from those with high income and excess savings to avoid the paradox of thrift.

“The overall household debt situation is not as dire as lending to the vulnerable groups, especially the B40, while aggressive bank lending to the middle and upper income groups may need to be tempered to avoid credit risks that could materialise in the event the economy takes a hit.

“Most banks undertake periodic stress tests and are therefore in a much better position to manage the ‘supply-side’ risks of any household debt problem that may arise. This is evident from their strong capital adequacy and loan loss provisioning,” he said.