PETALING JAYA: The household debt situation, which is high but manageable, should not make corporate Malaysia complacent but instead proactive measures should be taken to ensure that it does not worsen.
Improving financial literacy, minimising financial scams, raising productivity, and appropriate housing policy to raise the supply of middle and low-cost housing are among measures economic experts are advocating to address the situation.
According to economists, the risks include the inability of a borrower to service debt obligations in a timely manner.
Based on the study by the Bank for International Settlements, the acceptable threshold for household debt is 80% of gross domestic product (GDP).
Anything above the benchmark would result in a slower GDP growth.
Based on statistics, the largest share of household debt comprised residential properties, which account for 60% of total household debt, followed by motor vehicle (13%), and personal financing.
As a ratio, household debt to GDP has seen improvement from a high of 93% in 2020 to 81% in 2022.
As of June, the ratio was at 82%.
MARC Ratings Bhd chief economist Ray Choy
MARC Ratings Bhd chief economist Ray Choy told StarBiz the reason the country’s high household debt is manageable is due to the advanced state of the local banking system under Bank Negara’s effective stewardship.
In this regard, he said although the household debt-to-GDP ratio is high, interest rates in Malaysia had been low and stable, with significantly less volatility and fewer abrupt changes compared with some advanced economies.
This has facilitated financial planning, he said, adding that debt management agencies, including Credit Counselling and Debt Management Agency, have helped manage bankruptcies through counselling and solutions.
Consequently, Choy said the gross non-performing loan ratio had remained low and stable – hovering between 1.7% and 1.8%, over the last few years.
“Nonetheless, it remains worthwhile to reduce the household debt-to-GDP ratio by raising productivity and economic growth as well as reduce wastages to raise efficiencies whether at the government, commerce, or consumer level.
“Rebuilding financial buffers is necessary to bolster both institutional and individual credit strength as Malaysia’s household debt-to-GDP used to be 60% in 2008 compared with 81% in 2022,” he added.
Emphasising on financial planning, Choy said basic financial education and encouraging the saving habit should be inculcated among the younger generation.
Working with bankers will help to ensure consumers understand the range of risks associated with financial products such as predatory investments and scams, according to Choy.
Since housing loans comprised a large share of consumer lending, he said it is important that housing policies raise the supply of middle and low-cost housing.
“Notably, the below RM300,000 housing segment constituted 23.5% of the entire property market overhang in 2022, while the RM500,000 to RM1mil segment was at 33.6%.
“Meanwhile, hire purchase loans are also a major component of consumer financing, and it is encouraging that Malaysia has national car brands which offer a degree of competition in the motor vehicle market. The prices of vehicles should be lowered to enhance the public transport network,” Choy said.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said although the prevailing household debt is not alarming considering two-thirds of the debt are secured, financial literacy can be improved among Malaysians so that they are in better control of their finances.
“Furthermore, the risks of financial scams could potentially harm households as their savings and wealth could evaporate overnight. They need to be vigilant in managing their personal data so that they are well protected against financial scams,” he noted.
Separately, Afzanizam said the country’s household debt is not the highest in the region. He said the household debt-to-GDP ratio had gone down to 82% as of June compared with around 90% in the same month in 2021.
Based on the International Monetary Fund data, the household debt-to-GDP ratio in South Korea and Thailand stood at 105.1% and 86.9% in 2022.
RAM Ratings co-head of financial institution ratings Wong Yin Ching said while the level of household debt-to-GDP ratio remained elevated, it is not unexpected given the country’s young demographics which would continue to underpin strong credit demand, particularly for home purchase.
Residential mortgages, considered to be less risky, accounted for the majority of household debt at 60%, she said.
She expects household debt-to-GDP ratio to hover around the current level of 82% in the near term.
On the asset quality front, she said the gross impaired loan ratio of household loans is still robust at a low 1.3%.
RAM Ratings co-head of financial institution ratings Wong Yin Ching
She said banks’ lending practices remained prudent with the median debt service ratios of newly approved and outstanding household loans maintained at 42% and 36% respectively in the first half of 2023.
In addition, she said the median loan-to-value ratio of outstanding housing loans stood at 66%, which provides a comfortable buffer against the risk of a fall in property prices.
“That said, delinquencies are envisaged to be up given the expiry of most loan relief measures and higher cost of living. The segment that we are more concerned with is the lower-income households as they typically have higher leverage and less financial flexibility,” Wong said.
“On this note, labour market conditions remained favourable with steady wage growth while the unemployment rate has largely normalised to 3.4%. Hence, any deterioration in household loans is anticipated to be manageable.”
Meanwhile, Unitar International University economics professor Anthony Dass expects household spending to remain positive.
He said the healthy labour market, improving real wages, normalisation of overnight policy rate, improving sentiments, and a more positive economic outlook should cause consumption-related spending and credit to grow.
This bodes well for the economy which is poised to grow between 4% and 5% in 2024.
Unitar International University economics professor Anthony Dass
“On that note, the household debt-to-GDP ratio is expected to remain stable supported by steady household loans and GDP growth.
“Even if the ratio continues to climb, the central bank’s prudent lending standard and financial conditions would ensure there is no undue risk flaring up from the household debt.
“Banks are expected to continue focusing on asset quality, liquidity and adequate provisions against potential credit losses,” said Dass, who is also an economic adviser at KSI Strategic Institute for Asia-Pacific.
