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PETALING JAYA: Malaysia’s household debt-to-gross domestic product (GDP) ratio, which is the second highest in Asia, is expected to rise to the 88-90% range by the end of the year in anticipation of the economic contraction of the country. .
The ratio denotes total household debt as a proportion of the size of the economy measured by GDP, which is the total value of goods and services produced in the economy in one year.
Despite slower debt growth, the household debt-to-GDP ratio rose above its previous peak of 86.9% in 2015 to 87.5% in June 2020, mainly due to the strong contraction of nominal GDP in the second quarter.
Malaysia’s household debt to GDP is among the highest in Asia and has surpassed that of several high-income nations, including the United States and Japan.
Covid Challenge: Bank Negara projects a GDP contraction from 3.5% to 5.5% this year. The debt-to-GDP ratio of households is expected to rise to around 90% this year from 82.7% in 2019, according to an economist.
The country’s household debt to GDP last year stood at 82.7% compared to 82% in 2018. It peaked at 86.9% in 2015.
GDP for the second quarter experienced a 17.1% year-on-year contraction, the worst since the 1997 Asian financial crisis.
The World Bank has forecast that the economy will be hit hardest by the current Covid-19 crisis and Malaysia’s real GDP is expected to contract 4.9% instead of 3.1% for the year.
However, Bank Negara projects a GDP contraction of 3.5% to 5.5% this year.
Economists forecast a contraction in GDP growth induced by the third wave of the Covid-19 pandemic and external headwinds.
They feel that, to some extent, RM305b in the government’s economic stimulus would dampen the pressing household debt situation somewhat, but the ratio would remain high for the next two years.
Sunway University economics professor Yeah Kim Leng (pictured below), who is also a former external member of the central bank’s monetary policy committee, told StarBiz that the debt-to-GDP ratio of households is expected to rise. to around 90% this year from 82.7% in 2019 as a result of a projected 5% decline in nominal GDP and a 4% increase in household loans.
“The low base effect accounts for about four percentage points or about half of the increase, somewhat alleviating concerns about the high debt burden of households. On the bright side, despite the slowdown triggered by Covid-19 this year, credit flows to the household sector remain uninterrupted and this will provide key support for a consumption-driven economic recovery in 2021.
The level of household debt relative to GDP will likely persist in the 80-90% range for the next few years and will remain the second highest in Asia after South Korea, but behind several high-rise countries. income exceeding the 100% level. like 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 affected by the vulnerable segments of leveraged households,” he said.
AmBank Group chief economist Anthony Dass (photo below) agreed that there was mounting pressure on household debt to increase.
The pandemic not only affected business activity but also the job market, he said. It won’t be surprising if household debt to GDP exceeds 88%, according to him.
“What is still important now is to revive the economy at a steady pace and tackle the job market. With the rise of “new rules”, there will be a change in business operations and labor markets.
“With this new changing global landscape and companies struggling to maintain their cash flows, the challenge will be after the wage subsidy ends in December.
“That could lead to increased job losses or pay cuts. Added to the post-moratorium scenario, the pressure on household debt remains, ”said Dass.
He said the scenario could get worse if the motion control order (MCO) is imposed just to contain the spread of the virus.
Dass said another round of MCOs or strict measures of a conditional MCO would likely lead to more businesses going bankrupt and increased job losses.
Bank Islam’s chief economist, Mohd Afzanizam Abdul Rashid, felt that household debt was slowing down, judging by the figures.
The absolute amount of household debt for the first half of 2020 stood at RM1.27 trillion, representing a year-on-year growth of 4%, slower than the expansion of 5.5% at the end of 2019. Therefore, He said that the The growth rate of household indebtedness was already decelerating and the sharp increase in the ratio to GDP should not be interpreted as an increase in household liabilities.
“We believe that this trend will continue during the second half of the year and, perhaps, the index is likely to remain high by the end of the year. It should be around 88% of GDP, as nominal GDP is expected to decline by 4.2% this year.
“The main challenge would be those affected by Covid-19 with whom they have lost their jobs. The government has gone to great lengths to ensure that no one is left behind and must not be dogmatic in its approach to fiscal consolidation at this juncture, as economic recovery is highly dependent on the ability to contain the pandemic and eventual discovery. of vaccines. , ” he said.
Wellian Wiranto, an economist at OCBC Bank.OCBC Bank economist Wellian Wiranto expected household debt to rise from the 2019 level of 82.7% of this year’s GDP.
He said that the denominator effect had to be considered. Even if the amount of household debt had remained the same, the proportion would have increased due to the contraction of GDP, he added.
Wellian projects the economy to contract by around 5% in real terms this year, noting that the debt itself may have risen to some extent as well, as households may have to resort to taking on more debt to fix things.
“We do not make specific projections on the household debt ratio. But assuming growth and inflation projections of minus 5% and minus 1% year-on-year respectively, and even if the amount of household debt remained the same as at the end of 2019, the debt ratio would have recovered above the 87.5%. (as of June 2020). It does indicate a fairly substantial rebound in the household debt index this year, ”he said.
As for whether the government’s economic stimulus would provide any relief to the household debt scenario, Sí said it has contained home bankruptcies and escalating loan defaults.
“While manageable, household debt risk remains high due to job and income losses suffered by individual borrowers. Although the overall assets of the household sector outweigh the liabilities, the distribution of risks is uneven, skewing toward the most vulnerable low-income borrowers and highly-oriented middle-income households, “he said.
“Therefore, the central bank’s initiative to transition from an automatic blanket moratorium on October 1 is a welcome move to allow bank resources and payment assistance to be channeled in a more targeted way to really distressed borrowers, especially those in the B40 group and microenterprises, ”said Sí.
The central bank in its Review of financial stability for the first half of 2020 highlighted that some households, especially those with lower incomes, have suffered an increase in financial stress.
At the end of June 2020, the leverage ratio of households with a monthly income below RM3,000, which was already much higher than that of the rest of the population before the pandemic, increased to 9.5 times. Six months earlier, at the end of 2019, the leverage ratio had multiplied by nine.
Afzanizam agreed with Yes that a directed approach was better than a general one.
It makes sense for the central bank to introduce a more specific approach. In this regard, we believe that restructuring and rescheduling (R&R) measures would be more acceptable, as it would be a win-win solution for both parties: the financier and the borrowers, he said.
“It takes two to tango. Definitely, the government will constantly need to devise the appropriate measures and programs to alleviate the suffering of those affected.
“The recipient should reciprocate by doing their part to motivate themselves and respond accordingly to their environment,” he said.
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