Household debt of Malaysians has become an increasing concern for Bank Negara Malaysia (BNM), local economists and, with the looming elections, politicians. BNM’s household debt forecast by the end of 2012 is RM754.6 billion, an increase of 13.0% over 2011, and representing an average increase of 12.3% since 2008 (Figure 1).
This phenomenon is not unique to Malaysia alone. As living standards rose globally, consumer demand for goods increased, and thus easy credit encouraged a shift from saving to spending funded by debt. While rising household debt is in itself not national economic concern, what matters is when it is tracked against the Gross Domestic Product (GDP) or other various measures of household income.
Additionally, Debt Repayment Ratio – the percentage of a household’s income required to repay household debts – is used along with the abovementioned measures to determine the burden of debt of households.
On an individual household basis, BNM’s Credit Counselling and Debt Management Agency (AKPK)’s industry recommends that Debt Repayment Ratio be between 30% and 40%. In 2012, Malaysia’s Debt Payment Ratio was at 43.9%.
However, as the recommended levels are dependent on several factors such as type of debt, disposable income, liquid or current assets including savings and the number of dependents, applying these levels on a national basis (Figure 2) may not necessarily be a reliable barometer of the general financial health of Malaysian households.
BNM maintains that Malaysian household debt is still at a manageable level due to a corresponding expansion in household financial assets, of which high proportions are liquid assets such as cash savings. However, the ratio of household financial assets to household debt has declined from 274.3% in 2008 to 229.6% in 2012, while the liquid financial assets to household debt ratio declined from 175.3% to 148% over the corresponding period. BNM’s stance is also supported by the decrease in household NPL ratio from just 4.1% in 2008 to 1.5% in 2012.
Nevertheless, BNM has been concerned about Malaysian household debt levels which even the International Monetary Fund (IMF) has noted is rising steadily, placing Malaysia as one of the countries with the highest household debts in the region. As a result, since 2010, BNM increased supervisory focus and, along with the federal government implemented various macroprudential, fiscal and supervisory measures such as:
- Reintroducing Real Property Gains Tax for housing disposals within five years of purchase in January 2010 and further raising it in January 2011
- Tightening of lending conditions based on loan-to-value (LTV) ratios on mortgages in November 2010, January 2011 and December 2011
- Doubling the minimum price for house purchase by foreigners in January 2012
- Revising credit card eligibility requirements in March 2011
- Closer monitoring of non-bank lenders in 2012
The February 2013 IMF report on Malaysia’s Financial Sector Stability Assessment notes that the measures undertaken above have had some success, particularly on credit cards where overdue balances have declined 12% from a peak of RM2.9 billion in November 2011 to RM2.5 billion in February 2013. However, the IMF notes that it may be too early to fully assess its effectiveness, and that house price growth remains at historical highs.
Quantitative data gathered globally have demonstrated that countries with high household debts are exposed to greater risks in the event of an economic shock (e.g. property bubble bursting), or a prolonged economic slowdown, and tend to take a longer time to achieve economic recovery as reduced domestic consumption is also another negative probability of prolonged periods of high household debts.
While considered by BNM to be still manageable, the general consensus by the IMF and analysts is that more can be done to contain and reduce household debt, particularly to protect the low and middle income groups of the population in the event of the occurrence of an economic shock.
Troy Chung currently works in the financial services industry, and has previous experience in management consulting, IT and the automotive industry.