Households hold on, thanks to aid

Household cht

PETALING JAYA: Despite the ravaging effects of the Covid-19 outbreak on the economy, households were partially cushioned by the relief measures, according to Bank Negara in its Financial Stability Review for the first half of 2020.

The drastic reduction in the benchmark interest rate as well as the five rounds of economic stimulus, totalling RM305bil, also helped to weather the pandemic’s impact on household income and employment.

However, the central bank highlighted that some households, especially the lower earning ones, have suffered from increased financial stress.

As at end-June 2020, the leverage ratio of households with monthly income of less than RM3,000, which was already much higher than the rest of the population before the pandemic, increased further to 9.5 times. Six months earlier, at the end-2019, the leverage ratio stood at nine times.

For comparison, the leverage ratio of households earning between RM5,000 and RM10,000 monthly was only four times as at end-June 2020, marking a marginal increase from the 3.9 times in December.

“The higher leverage has been mainly attributed to an increase in borrowings for the purchase of homes earlier in the year and in June, following the reintroduction of the Home Ownership Campaign.

“Despite expectations for labour market conditions to improve, borrowers with variable income or employed in more adversely impacted sectors will also likely face continued challenges, ” Bank Negara said.

It is noteworthy that while the lower earning population faced increased financial stress, their liquid financial assets (LFA)-to-debt ratio was less than half that of households in the RM5,000 to RM10,000 income bracket.

Households with monthly income below RM3,000 had a LFA-to-debt ratio of 0.7 times, which means they own only 70 sen of LFA for every RM1 of debt.

In comparison, households earning RM5,000 to RM10,000 monthly have a LFA-to-debt ratio of 1.5 times.

LFA refers to assets that are easily converted into cash, such as bank deposits, investments in equities, unit trust funds and the surrender value of insurance policies.

Speaking to StarBiz, MIDF Research economist Mazlina Abdul Rahman said many Malaysians were pushed into financial stress in the first half of the year after companies began retrenching employees or introduced pay cuts in an attempt to cut costs and survive the Covid-19-induced economic crisis.

However, she pointed out that the Malaysian labour market conditions have gradually improved.

This was thanks to the easing of movement restrictions, the government’s financial assistance through wage subsidy and grants for businesses as well as Malaysians who quickly adjusted to new trending job offerings.

“Nevertheless, the labour market has yet to return to pre-pandemic levels and the most recent data for August 2020 showed that the unemployment rate remained unchanged at 4.7%, which suggests that recovery is slower than we expected.

“We also remain cautious on the recent resurgence of daily Covid-19 cases in the country and also in some other key foreign countries.

“This somehow suggests that the financial stress or leverage (faced by the population) will improve in line with the progress of the labour market in second half 2020. But the improvement is likely to be more evident next year in the hope of flattening Covid-19 infection curve or a vaccine, ” she added.

Mazlina expects the appetite for loans to increase gradually in line with the improving condition of the labour market and better income prospects.

The rise in loan demand will be further supported by low borrowing costs as Bank Negara has done a cumulative 125 basis point cut in the overnight policy rate (OPR) this year.

“Demand for financing by households could come particularly from groups who are less vulnerable to economic shock for purchases of passenger cars and residential property, among others.

“Loan applications for such purchases have been increasing in recent months from the troughs in April to May, ” she said.

As for business loans, Mazlina believes the demand may take longer to improve due to the high uncertainties domestically and externally.

“Besides Covid-19, the local political situation, US presidential election and trade skirmishes are some of the concerns.

“Based on the latest data, loan applications remain weak for most sectors, ” she said.

Bank Negara, in its Financial Stability Review report for the first half, reported that households have turned cautious post-Covid-19 and this has slowed the growth in household debt.

As at end-June 2020, household debt grew by only 4% compared to 5.5% in 2019.

“This was mainly reflected in the weaker loan growth for the purchase of residential properties and motor vehicles in first half 2020, which was 7.2% and negative 0.9%, respectively, ” the central bank said.

In comparison, residential property loans grew by 8.5% in 2019 while motor vehicle loans contracted by 0.4%.

Despite the slower growth in debt, the household debt-to-gross domestic product (GDP) ratio rose above its previous peak of 86.9% in 2015 to 87.5% as of June 2020.

This was mainly due to the sharp contraction in nominal GDP in the second quarter.

“This ratio is expected to decline as economic activity improves and households gradually resume loan repayments.

“Although household debt levels remain elevated, households are generally still borrowing within their means as reflected by the prudent overall median debt service ratio for outstanding and newly-approved loans of 35% and 43%, respectively (2019: 37% and 43%, respectively), ” stated Bank Negara.

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