Household debt under scrutiny


PETALING JAYA: While a stronger economic outlook is seen in the current quarter with the reopening of businesses, household debt remains a concern.

To be sure, the household debt-to-gross domestic product (GDP) ratio is expected to improve from last year’s figure of 93.2% due to improvement in economic growth.

However, the economy could face headwinds as Covid-19 remains as an immediate risk although new positive cases of Covid-19 have stabilised.

The ratio denotes total household borrowings as a proportion of the size of the economy measured by the GDP, which is the total value of goods and services produced in the economy in a year.

Furthermore, economists said that the lower-income group was still financially stretched from the effects of the pandemic.

The country’s GDP growth is projected to be lower at between 3% and 4% from an earlier estimate of between 6% and 7.5% year-on-year (y-o-y).

AmBank's Anthony DassAmBank's Anthony Dass

The household debt-to-GDP ratio moderated to 89.6% as at end-June 2021 from a high of 93.2% as at end-December 2020.

In the first quarter (Q1) of this year, purchases of residential properties accounted for about 56% of debt accumulation, followed by personal use (14.2%) and purchases of cars (12.3%).

AmBank Group chief economist Anthony Dass told StarBiz that the risk of rising household debt remains. “Fears are that the economy could potentially mirror a trend of the scenario during the 2008 Global Financial Crisis (GFC), where cheap loans enticed borrowers into a cycle of debt-fuelled growth that drove economic expansion but increased household debt significantly.

“During the GFC, household debt jumped from 72.4% of GDP in 2009 to a worrying 86.94% as at end-2015.

“This resulted in Bank Negara imposing a series of measures aimed at curbing the rise,” said Dass, who is also a member of the Economic Action Council Secretariat.

He added that in 2020 due to the pandemic and the unprecedented measures to contain the virus spread, the domestic economy collapsed by 5.6%.

Apart from stimulus measures, there were also cheap interest rates and loan moratorium. Still household debt-to-GDP climbed to 93.3%, he pointed out.

For 2021, Dass said expectations are for the household debt-to-GDP ratio to ease.

In Q1 of this year, it eased to 89.6%.

Still during that period, Malaysia was the third highest nation in Asia where household debt is concerned, after South Korea (107.6%) and Thailand (90.6%).

While expectations are for the household debt to ease further in Q2 driven by strong growth, Dass feels this trend may not last due to the rise in Covid-19 cases that had resulted in the imposition of the movement control order (MCO) 3.0.

“However, with the reopening of the economy and supported by stimulus measures plus the opt-in loan moratorium, it will help freeze any potential threat in household debts via bankruptcies and delinquencies.” he said, adding that the rise in non-performing loans (NPLs) were fairly muted.

On the whole, he thinks the country should witness a lower ratio in 2021 due to a higher nominal GDP growth. “Technically, the nominal GDP number will provide a good buffer to contain the rise in household debt,” he said.

A similar trend is expected in 2022.

“While there could be bankruptcies, delinquencies and NPLs may go up, the rise in household debt would be comforted by a stronger GDP in 2022, which is projected to hover between 5.4% and 6.0%,” Dass said.

RAM Ratings co-head of Financial Institution Ratings Wong Yin ChingRAM Ratings co-head of Financial Institution Ratings Wong Yin Ching

RAM Rating Services Bhd co-head of financial institution ratings Wong Yin Ching said based on Bank Negara’s data, borrowers earning less than RM5,000 a month have substantially higher leverage (debt over annual income of 7.4 times) and thinner financial buffers (liquid financial assets over debt of 1.0 time) as at end-December 2020.

“Those who have experienced job losses or salary reductions would be most susceptible due to their weaker financial flexibility,” she told StarBiz.She said the household debt-to-GDP indicator, however, remains elevated given the country’s young demographics, whereby the 25- to 39-year-olds, who are an asset accumulating class, account for a sizeable 27% of the population.

Based on RAM’s projected real GDP growth of 3.8% for 2021, she anticipates the household debt-to-GDP metric to stay high at slightly above 90%.

That said, she believes that the central bank’s existing macroprudential policies and prudent underwriting standards of banks will help contain risk for the household sector.

“The banking industry’s sturdy capitalisation and strong build up of provisions reserves through management overlays are also envisaged to provide ample buffers to absorb the likely rise in credit losses,” said Wong.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid (pic below) said people should not excessively become indebted.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul RashidBank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid

“There are debts which can be productive such as financing for a house in order to have a place to settle down and buying a car.

“What we are really concerned about is when people start to take on debts beyond their affordability and the purpose of financing is unclear.

“This will lead to financial stress which ultimately could result in other social problems,” he said.

He added that while debt could be a necessity, it had to be controlled and managed.

“The decision to take on debts rests with individuals.

“To this end, education in financial literacy is paramount to curtail household debt,” he said.

OCBC Bank economist Wellian Wiranto said he expects the household debt-to-GDP ratio to decline in 2021 compared with last year.

OCBC Bank economist Wellian Wiranto.OCBC Bank economist Wellian Wiranto.

However, the ratio is still expected to be above 90%, or at around 92% as he forecasts, by year-end.

“A slower economic momentum in the second half of the year is the culprit, pushing up the ratio due to the denominator effect via the nominal GDP amount.

“While Q4 should offer hope for a better growth uptick as the pandemic situation comes under control allowing for a gradual lifting of restrictions, Q3 was damaging.

“To remedy the situation, improving growth prospects for the economy would be most important.

“This would allow for better employment opportunities that can help households improve their financial situation,” Wellian said.

Centre for Market Education CEO and Institute for Democracy and Economic Affairs (Ideas) senior fellow Carmelo Ferlito (pic below) does not see much room for significant improvement in household debt, considering the hardships that many households were forced to face by prolonged lockdowns, with consequent job losses.

“And let’s not forget that the true size of the difficulties is not reflected in official statistics, as many people may have remained formally employed but forced to accept salary cuts or even no salary for several months, “ he pointed out.

To address the issue, targeted action is needed based on two pillars, according to him.

The first is economic growth led by private investments for a long-term sustainable path.

The second is financial literacy.

“Lockdowns have worsened the financial stability of the rakyat, but before that we had an excessive reliance on debt purchasing.

“This was not only and not always due to insufficient income, but also accompanied by bad spending habits,” Ferlito said.

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Household debts , banks , Covid , financial , debt , debt-to-GDP ,


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