Is our current household debt sustainable?

LOOKING at purely a financial aspect of the situation, the latest study conducted by the Khazanah Research Institute (KRI) titled “The state of Households II” has provided us data that will allow us to delve deeper into the issue by showcasing that on an aggregate level, our household debt to GDP ratio is still within a sustainable and affordable range.

“The total household financial asset-to-debt ratio has remained above two times over the past five years, while the total liquid financial asset-to-debt ratio has ranged from 1.4 to 1.6 times during the same time period,” the KRI study elaborated.

This indicates that despite a high debt to GDP ratio, on average Malaysian households have a ready pool of funds to meet debt obligations.

A report from the financial times (FT) titled “Malaysia’s household debt: How risky is it?” explained that a high household debt to GDP ratio isn’t necessarily a negative issue as some Asian countries with over 80 per cent of debt to GDP ratio such as Taiwan at 83 per cent, seems to be faring much better than others with a lower percentage.

“Countries where debt has grown gradually and where regulators implemented pre-emptive macro prudential policies are more likely to minimise blows to economic growth,” the FT report explained.

However, this is not the case for Malaysia as our household debt to GDP ratio experienced almost a 100 per cent increase between 2008 and 2014 due to acceleration from Malaysia’s favourable credit conditions and strong consumer demand.

This is a worrying figure as it is beginning to look eerily similar to household debt in the US on the eve of the subprime crisis when it peaked at 100 per cent.

The saving grace to this is that Malaysia’s nominal GDP in 2014 was only around 40th of the US’s in 2006.

Additionally, BNM Governor Datuk Muhammad Ibrahim previously said that household debt was one of the areas being monitored by the central bank on a regular basis.

“There are many ways of managing high household debt. One of the instruments that we use is the macro-prudential measure, in many forms. We do not prescribe to any particular target (for the household debt), we basically outlined what are the principles that should be adopted by our banking institutions if they want to be prudent.” said Muhammad Ibrahim.

Furthermore, the governor also highlighted that in order to ensure that the economy stayed in a healthy lane, it was very important to keep both employment and income growing.

However, this rapidly surging household debt is of concern as it may suggest that “Households are accumulating debt faster than their incomes are growing, which will likely lead to repayment difficulties when the credit cycle turns”, Standard & Poor wrote in a report last year.

The phenomenon is made more apparent as we look back on the KRI report which noted that when segmented into different income classes, lower income brackets face more repayment difficulties.

“We found out that different incomes classes face different financial risks and that households in the lower income brackets have a much higher leverage (debt-toincome) ratio compared to those in higher income brackets” stated the KRI report.

Data from Bank Negara Malaysia (BNM) confers this finding as well with statistics showing households earning less than RM3000 a month having a relatively low share of total household debt (22.6 per cent in 2015) but on average possessing a leverage ratio of seven times their annual income.

Additionally, BNM’s data also noted that over 50 per cent of users that entered AKPK’s DMP had earnings of less than RM3000 a month, and possessed higher rate of debt delinquencies for compact car hire purchase and personal financing loans.

This suggests that leveraged households in the lower income segment face more financial difficulties compared to their higher income counter parts.

“By comparison, higher income households have a much lower leverage ratio on average; around three times” added BNM.

One of the most probable causations for this could be that consumerism remains high in Malaysia and as a result lower income group households who cannot afford to buy all these high valued items with cash have resorted to loans and credit to finance their consumption.

This seems especially apparent in the property sector as recent years has shown BNM being quick to reduce housing loan approvals with stricter guidelines and eligibility.