KUALA LUMPUR (April 1): Malaysian household debt to gross domestic product (GDP) ratio hit a new high of 93.3% in December 2020 from its previous high of 87.5% in June 2020, according to Bank Negara Malaysia (BNM).
The BNM said this was mainly because the country’s household debt growth had normalized to pre-pandemic levels in the second half of 2020 (2H20), but GDP remained below levels of before Covid-19.
“High household indebtedness can lead to rapid household deleveraging in the aftermath of a crisis, slowing down or derailing the economic recovery,” warned the BNM in its report on financial stability for the second half of 2020 published yesterday.
Nonetheless, he said there was no significant evidence of deleveraging.
And while new disbursements from the banking system to households reached 112% of their corresponding levels during the same period last year, these disbursements were mainly extended to middle and high income borrowers (71%) who can still afford to take more loans, says BNM.
At the same time, measures taken over the years to encourage more responsible borrowing have partly mitigated the negative impact on low-income borrowers, the bank noted. “Loans continued to be supported by sound underwriting standards, with stable overall median debt service ratios for outstanding and newly approved loans of 35% and 43% respectively,” BNM said.
According to the BNM, the growth in household indebtedness in 2H20 was mainly driven by car loans and home loans, which increased by 6.1% and 7.4% respectively compared to the previous year, supported by a strong response to exemption from sales and service taxes for the purchase of cars and various home ownership incentives.
Personal financing saw a higher annual growth of 7.1%, in part due to the suspension of repayments during the period of automatic moratorium on loans, the BNM said.
“Recent shocks have underscored the importance for households to accumulate financial reserves during good times. These reserves allow households to weather periods of economic displacement, thus mitigating the impact on consumption and debt service.
“For the vast majority of borrowing households, the financial cushions remain largely intact. Growth in financial assets continued to outpace debt growth, driven by sustained growth in deposits and a recovery in mutual fund and equity holdings.
“This indicates that overall, households have been further successful in increasing their financial wealth during this period. In line with these trends, in 2H20, household repayments in the banking system reached 93% of the levels seen in the corresponding period of the previous year, indicating that most have resumed repayments, ”BNM said.
BNM, however, said those earning less than RM 3,000 a month remain financially strained, with low financial reserves and significantly higher leverage. Borrowers earning less than RM 5,000 per month also appear to be showing signs of financial stress, as shown by profiles of those applying for repayment assistance.
“These borrowers are likely to face persistent challenges in 2021, given an uneven labor market recovery. However, banks remain resilient against household sector risks, even under assumed higher unemployment and underemployment scenarios affecting more household borrowers, ”he said.
Should this be a cause for concern?
In the short term, economists believe this high level of household debt-to-GDP ratio is manageable and does not pose such a significant risk to the country’s financial stability.
“From a macroeconomic point of view, this should not have a significant impact on financial stability. Overall, the risk of the household sector for the entire banking system remains manageable.
“BNM has taken preventative measures and has the capacity to introduce other macroprudential tools if the financial environment demands it,” said Shakira Teh Sharifuddin, senior economist at the World Bank.
UOB (M) Bhd economist Julia Goh agrees, saying the high ratio is due to lower GDP due to the pandemic. It is also the result of government incentives to stimulate car buying and ownership.
“In a way, this has facilitated the recovery by supporting consumption in a low interest rate environment. Other household financial stability indicators do not suggest higher risks so far given the ratios. Stable financial assets / household debt and high excess savings, ”she said. The edge.
However, Tricia Yeoh, director general of the Institute for Democracy and Economic Affairs (IDEAS), is skeptical of the ability of low-income households to repay their loans and called on the government to reassess its policies to ensure that the economic recovery can be achieved without overburdening households. .
Likewise, the Executive Director of the Center for Socio-Economic Research (SERC), Lee Heng Guie, highlighted the disproportionate impact of the pandemic on different levels of household income. “Obviously, there are segments of the family that are facing financial difficulties right now. My concern is with those who are very well equipped, [who] will eventually go through a process of deleveraging to rebuild their savings. This in turn will reduce consumption and slow down economic growth later, ”he said.
And if such high levels of household debt persist, they can lead to an unhealthy and fragile financial system in the face of future economic disruptions. “In the long run, if there is another downturn and the high level of household debt is not resolved, then there is certainly less room for monetary policy to take effect because households are already in debt. at a high level, ”Shakira said.
Prominent economist Dr Nungsari A Radhi said the underlying problem is economic inequality, which, if left unaddressed, can pose a systemic risk to the entire financial system.
“The cause is inequality, of course we have to worry. On top of that, it’s unstable. Any change in income, especially for low-income households, will put them at risk of defaulting on these. ready, ”he said.
Read more stories from the BNM 2020 Annual Report here.