Is Malaysia Household Debt Unsustainable?

Malaysian households have nearly RM1.38 trillion worth of debt, exceeding what the federal government owes to its creditors (based on Starbiz report of 6 April 2022). Between 2018 and 2021, the household debt in Malaysia increased by almost 17%, raising concerns about the country’s debt-servicing ability. In addition, most Malaysian households have low buffers for saving.

According to Bank Negara, 76% of households have savings that can only cover less than three months of living expenses. The situation is worsened by the increasing cost of living factor and imprudent lifestyle choices. The low-income bottom 40% (B40) households are the worst affected. The B40 group has a net income of RM230 per month in 2019 after accounting for expenditures and financial obligations, according to Bank Negara. The middle 40% and top 20% households, on the other hand, have a monthly net income of RM1,127 and RM4,081, respectively.

With inadequate saving buffers, most Malaysians have no proper “safety net” and it is not surprising that many had to tap into their retirement funds as they were hit by salary-reduction and job-loss over the past two years.

The high household debt is also a problem when it comes to Malaysians seeking house loans. Bank Negara points out that 65% of borrowers already have either car or personal loans. This may constrain the prospective borrowers’ capacity to take on a housing loan, it adds.

The total household debt is contributed by hire purchase and personal loans, as well as credit card debt which stood at 28%.  It is noteworthy that about 55% of household debt is contributed by housing loans. Within the region, Malaysia has one of the highest household debt-to-gross domestic product ratios at 89%, compared with 9.9% in the Philippines, 17.2% in Indonesia, 69.7% in Singapore and 89.3% in Thailand.

The lack of cheaper housing options, despite projects announced by the federal and state governments, are causing Malaysians to take on high mortgage loans. Malaysia needs an economic strategy that aims at generating sound, investment-led growth and containing inflation by decreasing the quantity of money in circulation. That improves exchange rate and imported inflation.

With gaining urbanisation, owing a home becomes a priority for many. And so too having a car or a credit card. But when wages remain low, affordability is impacted even if liquidity in the system provides opportunities for asset acquisitions.

Although household debt to GDP is a broad ratio, a better way is to examine asset values to loans and also gross impairment of loans, especially to that of household borrowings. Household debt to GDP is not a great measure to determine if we are at risk in a downturn.

Reference:

High debt, low pay, Ganeshwaran Kana, The Star, 2 April 2022 

(Https://www.thestar.com.my )