ON the surface, the level of debt borne by Malaysian households is going down and Bank Negara officials and economists have described it as good news.

But the decline, said other observers, is not because the actual amount of debt has gone down. It is because the growth of household incomes has outpaced the growth of their debts.

And families earning below RM3,000, who comprise almost 40% of households in the country, still struggle to pay off their debts while being squeezed by higher living costs.

Household debt is measured as a percentage of gross domestic product (GDP), which now stands at 84.6% at the end of September, Bank Negara said.

In 2015, the household debt to GDP was 89.1%.

A debt-to-GDP ratio is a measure of total household debt in a country divided by the nation’s nominal gross domestic product multiplied by 100.

Economist Azrul Azwar Ahmad Tajuddin said the downward trend in household debt-to-GDP could be attributed to the growth of nominal GDP (the denominator), which outstripped that of household debt (the numerator).

At the end of 2010, GDP grew by 11.8% while household debt grew by 14.2%, said Azrul Azwar. At the end of 2015, GDP growth, which was at 4.6%, continued to lag behind debt growth at 7.3%.

GDP growth only started outpacing debt growth at the end of 2016, where it was 6.3% to 5.4%, he said.

By end of September, GDP growth was 9.9% while debt growth was 4.9%.

“The trend is significant in the medium to long term if it persists as it signals that consumers are paying off their debts or that they are taking on less debt.”  

Kelana Jaya lawmaker Wong Chen said the total amount of household debt, which is slightly about RM 1 trillion, has not fallen.

“This slowdown has to do with the housing market grinding almost to a halt, hence no newer borrowings,” he said, referring to the fact that most of the debt is from property and car loans.

“As a percentage to GDP, the debt level drop is being masked by growth in GDP,” said Wong who authored the federal opposition’s alternative 2018 budget.

“However, these macro numbers mean little to the high debt levels of the average Malaysian, who are overall, an unhappy lot.”

Systemic threat

BNM’s third quarter 2017 report acknowledges that households with an income below RM3,000 in urban areas still find it hard to repay their debts due to cost-of-living pressures.

But in general, the ability of households to repay their debts is adequate given healthy labour market conditions, such as wage increases, said Azrul Azwar.

Yet despite the decline, Malaysia’s household debt to GDP remains stubbornly high and higher than the average 63% ratio in advanced economies and the 21% average in emerging economies, he said.

“More needs to be done to limit any potential risk to the financial system and economy.”

This includes more policies to encourage repayment, sound assessments on loan applications, more prudent lending practices and tackling high house prices.

Wong of the Pakatan Harapan coalition said Putrajaya needs to admit to the root causes of high debts, which are low wages, expensive cars and expensive houses.

“To improve disposable income of the average Malaysian, the government can remove excise duties on cars and better regulate the housing industry to eliminate speculation.”  

In its report, BNM said the high levels pose little systemic threat to the economy as a majority of households have prudent debt service ratios of below 60% while the share of borrowings of vulnerable debtors is 20.6% of all household debt.

Esther Lai of Ram Rating Services Bhd said prudent measures by the government and improving labour market conditions have ensured that the ability of households to repay their debts will not worsen.

Wong agreed with this assessment but adds a caveat: “It is not a systemic risk yet but for how much longer can we continue to have substandard fiscal discipline and a kleptocratic governance systems?”