The problem of excess debt is not just a domestic issue. Globally, debt levels have soared to unprecedented levels. Global debt has hit a record US$300 trillion (RM1.32 quadrillion) or equivalent to 349% of global gross domestic product (GDP), notes S&P Global Ratings in a recent report.
This figure – monies owed by governments, households, financial and non-financial corporates – is higher than pre-global financial crisis (GFC) peaks. It works out to US$37,500 (RM165,563) of average debt for each person in the world versus a GDP per capita of just US$12,000 (RM52,980).
Debt is a double-edged sword. It is an effective tool to promote economic development and enhance living standards if used wisely and in moderation. On the other hand, the effects can be detrimental and lead to financial ruin if it is used in excess and not well-managed.
The Prime Minister has revealed that the federal government’s debt and off-budget liabilities have reached RM1.5 trillion, exceeding 80% of the country’s gross domestic product (GDP).
Excluding off-budget liabilities, the federal government debt-to-GDP ratio as at end-June 2022 stood at 63.8%. This is still below the government’s self-imposed statutory limit, which stands at 65%, up from 55% prior to the Covid-19 pandemic.
According to Bank for International Settlements’ (BIS) working papers, the threshold for government debt is around 85% of GDP. For household debt, the threshold is around 85% of GDP, while for corporate debt, it is 90%. Debt beyond these thresholds can be a huge drag to a country’s economy in the longer term.
According to Bank Negara Malaysia, the household debt-to-GDP ratio had reverted closer to pre-pandemic levels at 84.5% as at end-June 2022 after easing from 89.1% as at end-December 2021.
It is still among the highest in the region, behind that of South Korea, whose household debt-to-GDP ratio is more than 100%, as well as Taiwan and Thailand at around 90%.
The bulk of household debt in Malaysia comprised loans for the purchase of residential properties at 59.4% of the total RM1.4 trillion in the system as at end-June 2022. This was followed auto loans at 12.6%.
The central bank points out that lending standards remaining generally prudent, especially among banks, to ensure asset quality. It further notes that the share of more-risky borrowers with a debt-service-ratio of more than 60% remains fairly stable at 24% of total household borrowers, or 32.6% of total banking system loans. Household impairment and delinquency ratios increased marginally, but remained low and within expectations at 1.2% and 0.6%, respectively, as at end-June 2022.
Meanwhile, the non-financial corporate debt-to-GDP ratio had moderated to 104.4% as at end-June 2022 from 109.7% as at end-December 2021, Bank Negara data shows. The improvement is mainly due to stronger economic growth, with the GDP expanding 6.9% during the first six months of 2022, as compared to a slight contraction in the second half of 2021.
Debt may be part and parcel of life. But as past and recent economic crisis had shown, debt levels that are too high – be they in the government, household, or corporate sector – can ultimately be a drag to growth. As such, getting debt back to more reasonable levels is an important step to a resilient future.
So, a debt crisis globally may not happen but if one major developed economy is in serious trouble, the contagion can impact others and lead to a global crisis.
References:
A global debt crisis looms? Gurmeet Kaur, The Star, 18 Feb 2023
High on debt, Cecilia Kok, The Star, 18 Feb 2023
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