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Thursday March 1, 2012

Spend only on what you can afford

YOU knew it was coming, and the first salvo against Bank Negara's move to curb household debt by pegging loans to people's disposable rather than gross income was launched by the auto industry.

Their rationale for bringing up their case is sales in January, which showed a big drop. The number of vehicles people bought fell 25% in January from the same month a year earlier and 14% lower from December, which is normally a slow month.

Such a steep drop has the industry worried. Their contention is that the linkages of the auto industry is deep, and a big slump in sales will have an impact right through the supply line.

Perodua's sales in January were off by 11% while Proton, Toyota and Nissan, according to a report, saw sales fall by between 23% and 28%. Honda's sales were down 89%.

The national carmakers, being the segment that appeals most, out of necessity, to the lower income segment, didn't wait around to see if this was a blip.

They had seen the approval rate for loans following the new lending guidelines drop and are worried what the longer-term impact will have on them and the industry. A build-up of cars left unsold in the stockyard will mean lower production in the future.

Leading the meeting with the central bank, the national auto players pleaded their case.

But the best they could squeeze out of the central bank was an assurance that future applications for auto loans from consumers who have the ability and capacity to repay should continue to have access to such financing. There was no change in policy.

The plight of the national players also emphasises a weakness that is prevalent in the industry. Exports of Malaysian cars have been poor and the carmakers should not solely rely on Malaysian consumers as there are limitations to that market in terms of size.

A simple way to make the car more affordable is for the Government to lower taxes. I doubt that will get the go-ahead, even though it's best for everyone, as that will be a loss of government revenue.

By standing firm on lending based on affordability, Bank Negara is sending a message that it will not back track from its new guidelines.

As it is, household debt has increased by an annual rate of 12.5% over the past 10 years far more than the average growth rate of the economy and now stands at 76.6% of gross domestic product or GDP.

So as it stands, people have to get used to spending what they can afford because the examples of spending left unchecked is pretty scary.

One such problem of household debt build-up is in South Korea where the ratio of household debt to GDP is now at 160% and rising. That ratio is among in the highest middle to high-income economies.

It has left regulators scrambling to find ways to cool off the debt build-up and recently curbed non-banks from lending money.

High indebtedness levels will eventually mean less demand and its economic impact, especially when interest rates start to rise, would see people having less money to spend. God forbid what will happen when a recession strikes.

The problem is also on the low-income group where high debt levels would spell real hardship when conditions get worse.

Those are things the central bank is trying to prevent, and industry and people should find other ways of paying for what they can afford.

Deputy news editor Jagdev Singh Sidhu knows it's not fun but is learning to live within his means. That's why he did not shell out an extra S$40 to watch Liverpool win the Carling Cup on cable TV in Singapore even when his wife said okay.

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