Household debt to GDP may inch up

PETALING JAYA: As the domestic economy shows signs of strain coupled with external headwinds, the risk for household debt inching higher next year remains.

Although household debt to the country’s gross domestic product (GDP) has moderated over the last few years since its peak in 2015, economists and analysts concurred that this phenomenon should not be taken lightly.

As at end-June 2019, Malaysia’s household debt reached 82.2% of GDP compared with its peak of 86.9% in 2015. It is among the highest in Asia and has exceeded those of several high-income nations including the United States (75.0%) and Japan (58.2%).

For the third quarter, GDP growth stood at 4.4% – the slowest pace in a year.

A growth of less than 4.7% would indicate the country’s second consecutive year of slower economic expansion. GDP grew 4.7% in 2018, down from 5.7% in 2017.

Bank Negara is maintaining its GDP growth projection of between 4.3% and 4.8% for this year, although it has not made an official estimate for next year.

High house prices, especially post-2011, have been a key reason for the elevated household debt level in the country. The central bank noted that the house price-to-household annual income ratio was at 3.9 times in 2012 and had surged to 4.8 times as of 2016.

The Institute for Democracy and Economic Affairs is urging the government to focus on household debt, instead of home-ownership.

Senior fellow Carmelo Ferlito cautioned that further credit easing was “not the way to go” as it would harm financial stability for people who are already in a fragile situation.

Ferlito noted that the situation faced by the property industry required a “market-oriented approach.”

His comments came following Finance Minister Lim Guan Eng’s call for the central bank to ease the rules for mortgages to help first-time house buyers.

AmBank group chief economist Anthony Dass told StarBiz: “With a challenging 2020 outlook, the risk for household debt, which accounts for about 60% of gross loans, to inch up remains high.

“But whether it will reach the 2015 level remains to be seen. Much will depend on the outlook of the job market. The job market is increasingly becoming cautious with growing room for more layoffs and limited hiring.”

He added that the pressure is more likely to come from those earning RM5,000 and below a month due to their limited asset buffers to mitigate the risk of default.

Some analysts cautioned that there could be a risk of worsening in asset quality or the gross impaired loan (GIL) ratio next year from the global trade tensions.

Affin Hwang Capital said there was weakness in asset quality in commercial property and households. It said overall, the banking sector’s total impaired loans had risen by 12.1% on a year-to-date basis, with GIL at 1.62% in October 2019, which was driven primarily by the business working capital, residential and commercial property segments, the research house said.

As at end-October 2018, GIL was at 1.55%.

Dass said the bank lending standards for households had remained broadly steady since the regulator’s tightening measures over 2010-2013. The discipline is expected to continue.

“It is important to remain watchful for any significant easing in standards that could cause risks to accelerate once more, ” he said.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said Malaysia’s overall household debt level, after falling significantly recently, has started rising again, albeit marginally.

He said household debt to GDP as at end-September was at 82.4% compared with 82.2% in June.

“With the introduction of several loan assistance schemes in recent years, it is not surprising that residential property loans remain a key driver of debt growth.

“As we do not expect the rising trend to change any time soon, unaffordable housing could remain a major driver of household debt.

“The elevated household debt level should remain an issue in 2020 due to the expected slower GDP growth pace going forward and the high cost of living.

“Given the challenging economic backdrop, we expect the regulators to act quickly to dampen any sharp rise in household debt. It is thus unlikely that we will see household debt rising to the 2015 peak over the short to medium term, ” Zahidi added.

He stressed that while households could comfortably service their debt at a time when the economy is doing well, any unexpected income shocks arising from a sharp deceleration in economic activity could erode households’ ability to do so.

This would have repercussions on their future spending and borrowing trends, which in turn, affect the economy more broadly, he said.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the household debt-to-GDP ratio is likely to remain elevated at 82% in 2019 and 2020.

He felt the crux of the cause of the household debt issue had to do with financial literacy, which is lacking among Malaysians.

Ensuring Malaysians are financially literate is paramount to achieving a sustainable economy, he said.

“Basic things like savings, inflation, investment, risks and financial goals need to be ingrained in our society. This would allow households to make sound financial decisions, ” Afzanizam added.

Is the government then on the right track to improving the household debt situation?

He said to some degree, the administration was on the right path.

The Home Ownership Campaign, he said, has helped to reduce the entry cost for those who wish to buy their first home.

The income transfer programme such as Bantuan Sara Hidup and targeted fuel subsidies, he said, would to an extent relieve the financial burden among the low-income group.

“The Malaysian@Work programme would also encourage employers to take on new hires. However, the focus should be to promote financial literacy among Malaysians. Apart from household debt, investment scams were also quite prevalent despite numerous efforts to clam down on such bogus investments, Afzanizam noted.

Socio-Economic Research Centre executive director Lee Heng Guie said households earning below RM5,000 per month remained vulnerable to shocks, given their small income balance and low financial buffers.

Amid some uptick in the non-performing loans of properties in recent months, the household debt-to-GDP ratio is expected to remain stable or improve moderately in 2020 based on the application, approval and disbursement data.

He felt the government and Bank Negara have implemented a number of measures to contain household debt. These include the capping of the maximum loan-to-value (LTV) ratio at 70% for the third house financing facility, responsible lending practices, increasing the supply of affordable housing and containing the cost of living, especially prices of necessities to ease the financial burden of households earning below RM5,000.

“Other measures that the authorities can look into are enhancing financial literacy, and responsible as well as prudent financial management through education and improved financial knowledge.

“Greater efforts, including the strengthening of regulatory and financial surveillance to contain personal loans to undertake excessive risk-taking investments in financial assets that promise unrealistic high returns, are needed, ” Lee said.

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