Avoiding the credit bubble trap

More structural reforms are needed for household debt

“We take comfort that our regulators have always maintained prudent regulatory oversight and supervision.” Wong Yin 8hing

PETALING JAYA: While the domestic household debt situation is at a manageable level, structural issues need to be addressed to avoid a credit bubble.

Ambank Group chief economist Anthony Dass told Starbiz that it was important to avoid a “credit bubble’’ from forming if there is excessive debt, going forward.

“If the ‘credit bubble’ keeps ballooning without any increase in real income and at an unsustainable level, it will burst and domestic demand will become constrained as consumers struggle to pay their debts,” he said.

Dass added that the main concern of rising household debt would be on those in the lower and middle-income brackets, namely, the B40 and M40 segments.

“The severity of the impact would depend on their financial buffers and resources,” he said.

Poorer buffers, Dass said, would make them become more vulnerable to economic shocks, such as sudden price increases or an economic slowdown.

“If this materialises, their income and cash flow would be affected, thus affecting their ability to repay debt and in the worst-case scenario, result in a surge of bankruptcies and delinquencies,” Dass, who is also a member of the Economic Action Council Secretariat, said.

As long as household spending is at a manageable level, supported by solid wages and a well-contained underlying inflation, namely, retail prices of goods and services as opposed to the core inflation and a manageable borrowing cost, then the risk of a household debt crisis becomes more muted, Dass said.

“Taglines of rising bankruptcies and falling into poor credit qualities will take a backseat. This will certainly bode well for businesses and investors, as there will be more capital expenditure expansion and new business and investment activities taking place.

“The real challenge emerges when households have high debt with job uncertainty, rising underlying inflation and borrowing costs. Such a scenario would potentially weigh on spending and will have a knock-on impact on the gross domestic product (GDP).”

If this scenario is left unchecked, it could lead to a household debt crisis, Dass added.

“Under such circumstances, it may take a toll on our financial markets as well as businesses and investment. More so those who rely on domestic spending more than exports,” he noted.

Malaysia’s household debt-to-gdp ratio is among the highest in the region. Last year, the ratio improved to 89% from 93.2% in 2020.

Meanwhile, South Korea is at around 109.1%, Thailand 89.3% and Singapore, 69.7%, while at the lower end are Indonesia (17.2%) and the Philippines (9.9%).

To address the high household debt from creating a credit bubble, Dass said the rising cost issue needs to be looked into.

“While subsidies to an extent help, it is more of a temporary measure. We must be more committed to address real structural reforms that can help ease the rising cost of living.

“In this case, we must not keep changing the policy goal post that has already been crafted, but at best fine-tune it where necessary.”

Dass said there was a need to create more well-paying jobs across the board, including for farmers.

“Upskilling and reskilling of both the people and business entrepreneurs are vital. It is less effective if we only focus on upskilling and reskilling the people or job seekers while ignoring the entrepreneurs that include the farmers.”

Dass said the elevated household debt-toGDP ratio could remain at the current level by year-end due to the higher cost of financing and higher consumer prices.

RAM Rating Services Bhd co-head of financial institution ratings Wong Yin Ching said for household debt, concerns remained over the lower-income households, as they are more highly leveraged and possess thinner financial buffers.

She said the advent of alternative lending such as through buy-now-pay-later schemes or community credit lenders may add on to their overall financial burden.

“The credit quality of household loans has traditionally been sturdy with the gross impaired loan ratio hovering at a low of between 1% and 1.2%. Defaults, however, are envisaged to rise, as loan relief measures gradually expire in the first half of the year.”

Nonetheless, this is not viewed to be a material risk to the financial system, noted Wong. “We take comfort that our regulators have always maintained prudent regulatory oversight and supervision. Domestic banks have also been financially resilient in past credit down cycles,” she added.

OCBC Bank economist Wellian Wiranto said the good news is that Malaysia’s economic recovery has started to gain traction and would reduce the household sector debt as a proportion of GDP.

The not-so-good news, however, he said, was that even at the reduced state, the household debt level remained one of the highest in the region alongside Thailand and South Korea.

He said the issue may be especially pertinent for the lower-income group which had suffered disproportionately during the pandemic.

“Overall, it remains a structural issue that will take some time to resolve itself, including via greater awareness of the impact of taking on too many loans to support consumption, which is not sustainable in the long run,” Wellian said.

Commenting on household debt, Centre for Market Education CEO Carmelo Ferlito said what needs to be done is to identify the reason behind it. “On one hand I see a wage issue but there also may be a spending habit issue due to the lack of financial literacy,” he noted.

Elaborating on the steps to improve household debt, he said: “The first is to promote a sound economic growth model, which is one based on private investments financed by sound money (savings).

“Our growth model is unstable as it is rooted in private and government consumption and therefore it relies on debt. We need to change that.”

Malaysia University of Science and Technology economics professor Geoffrey Williams said household debt was not a concern if people could finance it and pay it off.

He said there was a sharp decline in repayments in 2020. “But it recovered last year and the latest first-quarter 2022 data showed repayments had risen.

“But for individual borrowers, the situation would depend on their personal circumstances and many people are still suffering because of the lockdowns,” Williams said.

He added that household debt itself should not be something to be alarmed about. “We shouldn’t be alarmed by household debt, it just needs good monitoring, financial literacy and active relationships between banks and customers,” he said.

Meanwhile, HELP University professor Paolo Casadio said the quality of the debt was important, which relates closely to repayments. “Provided people are working, have a stable income and can repay, then it should not be a problem.

“If incomes fall or the cost of borrowing rises too much, then there will be problems, but this is likely to be for specific groups or individuals.

“In these cases, the best thing to do is to encourage open discussions between borrowers and their banks to reschedule the loans. The government should not interfere with private debt contracts,” Casadio said.