Malaysia’s household debt-to-Gross Domestic Product (GDP) ratio surged to a new peak of 93.3% as at December 2020 from its previous record high of 87.5% in June 2020, according to Bank Negara Malaysia (BNM).
BNM said this was mainly because growth in the nation’s household debt had normalised to pre-pandemic levels in the second half of 2020 (2H20), but the GDP remained below pre-Covid-19 levels. “A concern over high household debt is that it may lead to a rapid deleveraging by households in the aftermath of a crisis, thus dampening or derailing economic recovery,” BNM warned in its Financial Stability Review for Second Half 2020 report released on 31 March 2021(Emir Zainul in TheEdgeMarkets.com reviewed the report).
According to BNM, household debt growth in 2H20 was mainly driven by car and housing loans, which expanded 6.1% and 7.4% from a year earlier respectively, lifted by strong response to sales and service tax exemption for the purchase of cars and various homeownership incentives.
BNM said that those earning less than RM3,000 monthly remain stretched financially, with low financial buffers and substantially higher leverage. Borrowers earning less than RM5,000 monthly also appear to be showing signs of financial stress, as observed from the profiles of those seeking repayment assistance.
In the short term, economists believe this high level of household debt-to-GDP ratio is manageable and do not pose that significant a risk to the country’s financial stability.
A Bank for International Settlements (“BIS”) study suggested that debt boosts consumption and GDP growth in the short term (over one year). But the long-run negative effects of debt eventually outweigh short-term positive effects. A 1% increase in household debts to GDP tends to lower output growth by 0.1% in the long run. BIS has determined the threshold for negative effects to kick-in is when household debt to GDP ratio exceeds 60%. The greater impact is when this ratio exceeds 80%.
An IMF study in 2017
confirmed that there is a trade-off between short-term benefits and medium term
costs of rising debt. In the case of the IMF, it was observed that a 5%
increase in household debt to GDP results in a 1.25% decline in real growth in
three years into the future. And a 1% increase in debt raises the odds of a
future banking crisis by about 1% point.
Mitigating the risks include better financial regulation and lower income inequality. Those economies with less external debt, floating exchange rates and are financially more developed seem better placed to weather any crisis.
BNM may find itself in a difficult
situation in the present “high” ratio. Monitoring borrowings by the lower
income group and early re-scheduling of debt will mitigate risks. Nonetheless,
it is only in having higher incomes and better income distribution will we be able
to resolve this ballooning ratio.
References:
1.
Malaysia’s household debt-to-GDP ratio
surges to new peak of 93.3%, Emir Zainul, theedgemarkets.com, April 1, 2021
2.
Rising household debts: what it means for
growth and stability, Nico Valckx, https://blogs.imf.org,
October 3, 2017
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