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The high debt level is a concern

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PETALING JAYA: Household debt is a growing concern and could pose a problem for consumption growth if wages do not rise fast enough.

Most Malaysian households were mired in high debt even before the Covid-19 outbreak in early 2020 globally and slowing economic growth due to the Covid-19 pandemic was among the major contributing reasons. to high household debt, according to economists.

The executive director of the Socio-Economic Research Center (SERC), Lee Heng Guie, said the country’s household debt was a growing concern even before the Covid-19 pandemic.

He said Bank Negara has made relentless efforts to contain the country’s household debt as it is one of the highest in the region.

“High household debt does not necessarily translate into low consumption. What we need to pay attention to are borrowers with monthly income below RM5,000 who are at risk of potential shocks,” he told StarBiz.

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Lee said Malaysia had one of the highest household debt-to-gross domestic product (GDP) ratios in the region, at 89%, compared to 9.9% in the Philippines, 17.2% in Indonesia, 69 .7% in Singapore and 89.3% in Thailand. .

According to Bank Negara, Malaysian household debt had ballooned to nearly RM1.4 trillion as of June 30, 2021, surpassing federal government debt. It’s on the back of an adult population of 21.8 million in Malaysia.

The Covid-19 pandemic has further put pressure on household debt which jumped by almost 17% between 2018 and 2021, which could have an impact on consumer risk due to high service responsibilities. the debt.

“High household debt will certainly limit household spending, especially if incomes do not rise.

“What is most concerning is that highly indebted households and individuals will face a higher likelihood of financial distress in the event of a change in economic conditions, such as job loss or an increase in interest rates,” Yeah said. Kim Leng, professor of economics at Sunway University.

He warned that a rise in interest rates would impact consumer consumption growth as individuals or households will have to cut spending due to heavier debt service.

In the first half of 2021, the largest share of household debt was mortgages, which accounted for 58% or RM812bil, followed by consumer loans at 16% or RM224bil – personal and credit cards. Car and other vehicle loans totaled 12% or RM168bil.

It should be noted that over the last decade the government has been pushing for the Home Buyers Scheme as well as the Affordable Housing Scheme through various funding schemes such as My First Home, Youth Housing and MyHome.

Yeah said while the push into homeownership inevitably results in persistently high levels of household debt, it’s not a growing concern as property values ​​remain intact.

“As long as the value of the asset or property remains intact and the debt service capacity of borrowers is not compromised, the current high level of household indebtedness will not threaten the economic and financial stability of the country,” he noted.

Bank Negara has maintained its overnight policy rate (OPR) at 1.75% since July 2020, when it cut the rate by 2% to support economic growth which has been affected by the Covid-19 pandemic and movement control orders to curb the rate of infection. The OPR at 1.75% is the lowest since 2004.

Providing low-interest loans may temporarily ease the burden during the Covid-19 pandemic, but is not sustainable in the longer term.

SERC’s Lee pointed out that a prolonged low interest rate environment could be detrimental to the economy due to credit-fueled consumption.

“Keeping interest rates low for too long is not good because we cannot continuously borrow on credit to support spending,” he added.

He said consumers need to look at their spending habits, be disciplined in their savings, and not just focus on short-term spending needs.

Chief Economist of Bank Islam Malaysia Bhd, Mohd Afzanizam Abdul Rashid, said Malaysians need to boost their knowledge of financial literacy.

“Bank Negara recognized the problem and took the necessary steps to control it. Given this, it is only fair that borrowers also need to improve their level of financial literacy,” he said.

Despite the worrying level of household debt, Afzanizam said the strength of Malaysian household consumption remained resilient.

According to Bank Negara, the debt service ratio (DSR) for newly approved and outstanding loans remained stable at 44% and 35%, respectively, in June 2021.

“After taking loan repayment into consideration, the disposable income is still quite good.

“Meanwhile, borrowers who have a DSR of over 60% typically earned a monthly income of over RM5,000. This would mean that such borrowers would have more headroom, given the size of their income.

“While the household debt ratio has remained high, repayment capacity is still intact, with the depreciation rate remaining stable at 1.03% in December 2021 (December 2020: 1.09%).

“Given this, the current level of household debt should not hamper the strength of Malaysian consumers,” he told StarBiz.