Monday, 02 Nov 2020
PETALING JAYA: Malaysia’s household debt-to-gross domestic product (GDP) ratio, which is the second highest in Asia, is expected to rise and be at the 88% to 90% range by year-end in anticipation of the country’s economic contraction.
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.
Despite the slower growth in debt, the household debt-to-GDP ratio rose above its previous peak of 86.9% in 2015 to 87.5% as of June 2020, which was mainly due to the sharp contraction in nominal GDP in the second quarter.
Malaysia’s household debt to GDP is among the highest in Asia and has exceeded those of several high-income nations, including the United States and Japan.
The country’s household debt to GDP last year stood at 82.7% against 82% in 2018. It peaked at 86.9% in 2015.
The GDP in the second quarter saw a contraction of 17.1% year-on-year, which was the worst since the Asian Financial Crisis in 1997.
The World Bank has forecast that the economy would take a bigger hit from the ongoing Covid-19 crisis with Malaysia’s real GDP expected to contract by 4.9% instead of 3.1% for the year.
Bank Negara is, however, projecting a GDP contraction of 3.5% to 5.5% this year.
Economists are forecasting a contraction in GDP growth induced by the third wave of the Covid-19 pandemic and external headwinds.
They feel that to an extent, the RM305bil in government economic stimulus would somewhat cushion the pressing household debt situation but the ratio would still remain elevated over the next couple of years.
Sunway University professor of economics Yeah Kim Leng, (pic below) who is also a former external member of the central bank’s monetary policy committee, told StarBiz that the household debt-to-GDP ratio is expected to rise to around 90% this year from 82.7% in 2019 on the back of a projected 5% decline in nominal GDP and a 4% increase in household borrowings.
“The low base effect accounts for about four percentage points or about half of the increase, somewhat alleviating concerns over the high household debt load. On the positive side, despite the Covid-19-triggered downturn this year, credit flows to the household sector remain undisrupted and this will provide a key support for a consumption-led economic recovery in 2021.
The household debt-to-GDP level would likely persist in the 80%-90% range over the next several years and remain the second highest in Asia after South Korea, but trails a number of high-income countries that exceed the 100% level such as Australia, Switzerland, Denmark, Norway and Canada.
“This suggests that as long as the country’s GDP and per capita income growth can be sustained, the resilience of the economy and the banking sector will not be impaired by vulnerable segments of the leveraged households, ” he noted.
AmBank Group chief economist Anthony Dass (pic below) agreed there was growing pressure on household debt to rise.
The pandemic not only impacted business activity but also the job market, he said. It will not be surprising for household debt to GDP to cross 88%, according to him.
“What remains important now is reviving the economy at a steady pace and addressing the job market. With the increasing ‘new norms’, there will be a change in business operations and job markets.
“With this new changing global landscape and businesses struggling to sustain their cash flows, the challenge will be after the wage subsidy ends in December.
“That could see a spike in job losses or paycuts. Added with the post-moratorium scenario, the pressure on household debt remains, ” Dass noted.
He said the scenario could worsen should the movement control order (MCO) be imposed just to contain the spread of the virus.
Dass said another round of MCO or stringent measures of a conditional MCO would most likely see more companies going under and job-losses spiking.
Bank Islam chief economist Mohd Afzanizam Abdul Rashid felt that household debt was slowing down, judging from the figures.
The absolute amount for the household debt for the first-half of 2020 stood at RM1.27 trillion, which represented a 4% year-on-year growth, slower than the 5.5% expansion at the end of 2019. Therefore, he said the rate of the household indebtedness growth was already slowing and the sharp rise in the ratio to GDP should not be construed as households are ramping up their liabilities.
“We believe such a trend will remain the second half of the year and perhaps, the ratio is likely to remain elevated by year-end. It should settle around 88% of GDP as the nominal GDP is expected to decline by 4.2% this year.
“The main challenge would be those who are affected by the Covid-19 with those who have lost their jobs. The government has done its best to ensure that no one will be left behind and should not be dogmatic in their approach on fiscal consolidation at this juncture, as the economic recovery is heavily dependent upon the ability to contain the pandemic and the eventual discovery of vaccines, ” he said.
OCBC Bank economist Wellian Wiranto expected household debt to tick up from the 2019 level of 82.7% of GDP for this year.
He said there was the denominator effect to consider. Even if the amount of household debt itself had stayed the same, the ratio would have gone higher because of the contraction in GDP, he added.
Wellian is projecting the economy to shrink by around 5% in real terms this year, noting that debt itself may have increased to some extent as well, as households may have to resort to taking on more debt to tide things over.
“We do not make specific projections on the household debt ratio. But assuming there is growth and inflation forecasts of minus 5% and minus 1% year-on-year respectively, and even if the household debt amount stayed the same as at end-2019, the debt ratio would have picked up to above 87.5% (as at June 2020). It does signal a fairly sizeable uptick in the household debt ratio this year, ” he said.
As to whether the government’s economic stimulus would provide some relief to the household debt scenario, Yeah said it has contained household bankruptcies and loan delinquencies from escalating.
“While manageable, the household debt risk remains elevated due to job and income losses suffered by individual borrowers. Although the overall assets of the household sector exceed liabilities, the distribution of risks is uneven, being tilted towards the more vulnerable low-income borrowers and highly geared middle-income households.” he said.
“Hence, the central bank’s initiative to transition from an automatic blanket moratorium on Oct 1 is a welcome move to enable the banks’ resources and repayment assistance to be channelled in a more targeted manner to the genuinely distressed borrowers, especially those in the B40 group and micro-enterprises, ” Yeah said.
The central bank in its Financial Stability Review for the first half of 2020 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.
Afzanizam agreed with Yeah that a targeted approach was better than a blanket one.
It makes sense for the central bank to introduce a more targeted approach. In this regard, we believe the restructuring and rescheduling (R&R) measures would be more palatable as this would be a win-win solution to both parties – the financier and the borrowers, he said.
“It takes two to tango. The government will definitely need to constantly figure out the right measures and programmes to alleviate the sufferings of the affected people.
“The recipient will need to reciprocate by doing their part to be self-motivated and respond accordingly to their surroundings,” he said.