Household debt in Malaysia – Is it sustainable?

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A recent study by Khazanah Research Insitute (KRI) on the state of households in Malaysia also paints a worrying picture. The report, entitled simply “The State of Households”, shows that consumerism is high in Malaysia, with many households owning discretionary durable goods such as television, washing machines, refrigerators, cars and motorcycles, despite their relatively low-income levels.Most households in the country cannot actually afford to buy all those high valued items with cash; so, they are doing so on credit. “The buyer pays more than a quarter of the purchase price in interest payments. The problem is most acute with consumer durables – rates are almost 50% per year,” the research arm of sovereign wealth fund Khazanah Nasional Bhd says of the impact of “ansuran mudah” (affordable instalment schemes) on households.

While it can be seen as a type of risk, high levels of household debt is a reflection of how easily the average Malaysian can get access to credit and what Malaysians are willing to go into debt for. Spending using borrowed funds can boost economic growth but it can also slow the economy when households are forced to restrain spending in order to service their loans. Thus there are unfavourable policy implications and economic impact when household debt keeps rising. Looking at it from the other side of the coin, the high rate of household debt in the country is not necessarily bad. For an average Malaysian for instance, taking on debt with a reasonably low interest to acquire productive assets, such as a home, is beneficial in the long term. As long as people’s salaries keep rising, growing household debt should be no serious cause for alarm – although of course, minimum wage is yet another topic under continuous debate in the country. 

It’s also a reflection of the demographic changes in the country. The youth are moving to cities like Kuala Lumpur and with their move, they’re looking to acquire their own abode. It’s likely that they’re going to find one in a high-rise such as a condo that have sprouted around the capital. This demand is one factor that helps drive property prices higher. On the risks to the banking sector due to the high levels of household debt, the BNM says that the risks to financial stability from household lending “remain well-contained.” The banking system’s loan delinquencies remain low and are even in a downward trend. Household stress simulations also show the strength of the banking system against losses from household loans.

As at the end of 2013, Malaysia’s household debt is valued at 86.8% of the country’s GDP, which is a substantial increase from 60.4% of GDP in 2008. While economists have long voiced their concern of the potential risks of Malaysia’s high household debt to the country’s growth, Bank Negara has brushed aside such concerns, saying that household debt in Malaysia remains at a manageable level as household financial assets have been expanding in tandem. The International Monetary Fund, World Bank and HSBC are among some of the international organisations that have warned Malaysia over the high level of its household debt.

But obviously, the problem is not unique to Malaysia, as several countries in the Asian region have also seen a dangerous spike in household debts in recent years, thanks to the availability of “cheap money” as central banks all over the world cut interest rates to boost their economies to counter the impact of the 2008/09 global financial crisis. As it stands, Malaysia’s debt-to-GDP-ratio is the highest in Asia. Trailing closely behind is South Korea at 86%, followed by Thailand at 84% and Taiwan at 82%. Debt-fuelled consumption in many Asian economies may have helped boost growth in recent years. But as the current economic environment shifts, with central banks starting the tightening cycle amid a highly uncertain global economy, many countries in the region may well be facing a new danger. Unsurprisingly, therefore, the theme of late is whether a new financial crisis is brewing in Asia because of the region’s high debt levels.

Government efforts to increase the supply of affordable houses should be lauded. This would have an effect on the main component of the household debt-to-GDP ratio and help a lot of people, like Adam and Sarah, acquire their own home. This policy move would be a more precise way to bring down household debt levels. Another option for the government would be for the central bank to come up with new rules on bank loans and this option can address both the housing loan and auto loan component of household debt.