WE are living in challenging times.
With the global condition still in a fragile state, the Malaysian economy will likely face several more lean years ahead.
And it is a matter of concern, as data continues to show that many households in the country are a vulnerable lot, given the state of their finances.
Highly-leveraged with little savings, many will find themselves in a quandary in the event of a financial shock, which could stem from a loss of job, changes in interest rates or financial markets; or other factors such as physical impairment, death and divorce.
To put that into perspective, a study on the financial fragility of urban households in Malaysia has found that only 10.8% of them would be resilient to financial shocks.
The same study, as highlighted in the recently published State of Households II report by Khazanah Research Institute (KRI), indicates that more than 50% of the country’s urban households did not have any savings, and 20% would only be able to survive for less than three months if their incomes were cut off.
Similarly, Bank Negara’s Financial Inclusion and Capability Study finds that only 6% of Malaysians can survive for more than six months, and 18% up to three months, if they lost their main sources of income.
As it stands, 65% of household income in Malaysia is sourced from paid-employment.
“The job market condition has turned soft, as evidenced by the recent pick up in unemployment rate, and the lack of social safety net in Malaysia means that many households can only fall back on their own savings in the event of an economic shock,” independent economist Lee Heng Guie says.
“But if households have high debt levels and not enough buffer or savings in terms of liquid assets, they could face a lot of problems,” he tells StarBizWeek, noting that the risk is most prevalent among the lower income group, which is defined as households earning less than RM3,000 per month.
Malaysia’s unemployment rate stood at 3.4% as at June 2016, up from 3.2% a year ago.
Recent data, including the Monster Employment Index, which is a gauge of online job postings, suggests that hiring across key sectors such as oil and gas; banking and finance; hospitality; and retail remain muted amid the prevailing uncertain economic and business conditions.
“We are in the throes of economic slowdown and uncertainty; if our economy slows down further and inflation accelerates, many households will be affected,” Tan Sri Ramon Navaratnam, chairman of Asli Centre of Public Policy Studies, says.
“As it is, many are living from hand to mouth, with their ‘heads just above the water’, they will be in crisis if the economy slows down further and this can cause major social problems for the country,” he says, noting that the potential social instability will depend on how long and deep the slowdown will last.
Malaysia’s economic growth is at its slowest in seven years at 4% during the April-June quarter of 2016 from 4.2% in the preceding quarter due to the persistently weak external environment.
Flawed economic model?
Ramon argues that policymakers need to have a serious look at the country’s economic model again and come up with an honest analysis over what went wrong.
“We need to look at how our economic model could result in having almost 90% households who are so vulnerable to economic shocks – could it be because of ongoing corruption, persistent wastage, poor income distribution or abuses of the National Economic Policy,” he says.
According to KRI, which is a research arm of sovereign wealth fund Khazanah Nasional Bhd, the conundrum of high debt and low savings that puts many Malaysian households at risk is mainly a result of their relatively low income levels, but high consumerism.
“The bottom line is, household incomes have to improve,” KRI managing director Datuk Charon Mokhzani says.
“The Government has already outlined many initiatives, such as efforts to move the economy up the value chain and so on, to boost household incomes... we need to remain focused and accelerate these efforts,” he adds.
KRI notes that household incomes and expenditure are as important yardstick of the nation’s well-being as more aggregate measures such as the gross domestic product.
Official statistics show that the median household income in Malaysia has improved to RM4,585 per month in 2014 from RM3,626 per month in 2012.
For the low-income group, who makes up the bottom 40% of Malaysian households, the median monthly income has improved to RM2,629 from RM1,852.
The middle-income group, who makes up 40% of Malaysian households, on the other hand, saw an improvement to RM5,465 per month from RM4,372 per month previously, while the better off, who make up the top 20% of the country’s households, earn a median income of RM11,610 per month in 2014, compared with RM9,796 per month in 2012.
While KRI’s report does not reveal anything new, being merely compilation of readily available data from various government agencies, it does give a comprehensive overview of the state of Malaysian households.
It notes that Malaysian households spend most of the income on housing, transport and food – prices of which are all on a rising trend. Food inflation, in particular, has risen faster than overall inflation.
The lower-income group remains worse off.
KRI points out that richest households need only to allocate 9.9% of their monthly expenditure, or RM992, on food, while the poorest households, who earn less than RM2,000, have to spend 30.4%, or RM403, of their monthly expenditure on food.
In general, consumerism remains high in Malaysia, with many households owning discretionary durable goods such as television, washing machines and refrigerators, as well as cars, motorcycles and mobile phones.
According to KRI, low-income households that cannot afford to buy all those high-valued items with cash have resorted to loans and credit to fund their consumption, while the wealthiest tend to pay by cash.
It notes that while the better-off choose credit based on interest rates, the least well-off, who tend to have low financial literacy and limited access to debt, choose based on what is on offer and the instalment payments they can afford, rather than the true Annual Percentage Rate (APR). The latter could ultimately result in the least well-off paying significantly higher prices for their consumption.
“In our previous state of households report, we had proposed several measures to reform household debt such as requiring all providers of consumer credit to prominently advertise the true APR, realigning the regulation of consumer credit between the various government agencies currently in charge, and mandating the teaching of basic financial literacy in schools. To date, these proposals have yet to be implemented,” Charon says, adding that it is important for consumers to know the actual costs they are paying through credit purchases.
Malaysia is noted to have the highest household-debt-to-GDP ratio in Asia. Household savings, which is a major component of financial resilience, on the other hand, is low.
The country’s household-debt-to-GDP ratio rose to 89.1% last year, from 87.4% in 2014. It remains significantly higher than that of Indonesia at 17% and Singapore at around 60%.
The bulk of the household debt in Malaysia has been undertaken to finance appreciating assets such as residential properties and securities.
Meanwhile, Malaysian household savings stood at 1.5% of adjusted disposable income in 2014, which is the last year for which such data was publically available. Between 2006 and 2014, household savings averaged at 1.6% of adjusted disposable income.
By comparison, the US household savings rate, which is generally acknowledged as being very low, is much higher at 5%.
“The ratio of 1.5% of household savings to adjusted disposable income in Malaysia is an average figure; some households may save far more than others, and are therefore more financially resilient,” KRI says.
According to economists, the high household debt in Malaysia is unlikely to pose a systemic risk to the country’s economy. This is because the trend is accompanied by a similar increase in financial assets and Bank Negara has taken several macro-prudential measures to prevent financial imbalances.
Overall household balance sheet remains healthy, with the total household financial asset-to-debt ratio standing at more than two times over the past five years and total liquid financial asset-to-debt ratio ranging from 1.4 to 1.6 times over the same period.
But the reality is that while household balance sheets look healthy at the aggregate level, households in different income classes face different financial risks.
“Households in the lower income brackets have much higher leverage, that is debt-to-income ratios, compared to those in higher-income brackets,” KRI notes.
According to Bank Negara, although households earning less than RM3,000 a month have a relatively low share of total household debt (22.6% in 2015), they have a leverage ratio of seven times their annual income, on average.
By comparison, higher-income households have a much lower leverage ratio at around three times on average.
KRI notes that the pressing concern is how much debt low-income households have taken on relative to their ability to pay. They spend most of their income and have little savings, making them susceptible to financial stress should interest rates and inflation continue to rise.
Debt-fuelled consumption in Malaysia may have helped support the country’s growth in recent years.
But with headwinds increasing, it is pertinent to consider measures to counter the potential impact of a global slowdown on the many vulnerable households in the country. They are after all part of the engine of growth at a time when the country is counting on domestic consumption to support the economy.