KUALA LUMPUR, Feb 8 — Malaysian households’ debt are approaching levels that could force them to deleverage at a time when the economy is in dire need of domestic consumer support, according to economists and financial analysts monitoring the region.
In an assessment of the risks of high household debt in Asia by the Financial Times, Malaysia and Thailand were identified as the two economies most vulnerable from their citizens’ borrowings, due in large part to their central banks’ reactive natures.
Both Asean neighbours had their household debt to GDP levels almost double from the Global Financial Crisis of 2008 to 2014; in Malaysia, this was fuelled by lax lending rules and a strong appetite for borrowing among consumers, and reached 88 per cent of GDP — the highest in the region.
Aside from leaving consumers with little room left to borrow for more spending, the high household debt level also meant the banking capital requirements needed to sustain such loans could leave financial institutions vulnerable if the rest of the economy begins to falter, as is happening now.
Already, the signs of the stress to the financial system are showing; Bank Negara Malaysia last month unexpectedly cut the statutory reserve requirement by 0.5 basis points to provide a needed liquidity infusion for local banks.
“Household debt is a growth problem, not a financial system problem,” Frederic Neumann, co-head of Asian economic research at HSBC in Hong Kong, was quoted as saying in the FT report.
The debt level is also hampering local consumer spending, a critical fallback for Malaysia given the current slowdown in the larger global economy.
Household debt in Malaysia had reached sufficient levels to prompt Bank Negara into introducing stricter lending rules that considered a borrower’s aggregate debt obligation, severely reducing the ability of many to qualify for new or additional loans.
This has already resulted in recurring complaints from buyers and businesses over the difficulty in securing credit.
Worryingly, however, is that despite the new lending rules, Malaysian household debt has showed no signs of abating and only continued to increase, indicating that the measures were likely too little and too late, according to the FT report.
BNM also chose last month to keep the overnight policy rate unchanged.
Although Fitch Ratings said commercial banks in Malaysia and Thailand have enough financial buffer to handle their countries’ high household debt, another ratings firm — Moody’s — saw fit to downgrade Malaysia’s macroeconomic profile last month.
It cut Malaysia’s “Strong” to “Strong-”, citing a deteriorating environment for local financial institutions.
Malaysia’s economy has been pressured by a host of external factors including slowing global growth and a crash in the commodities market, where oil price fell from over US$110 (RM457) two years ago to below US$30 (RM124) currently.
The fall in oil price has forced Putrajaya to revise its annual budgets for 2015 and 2016 to reflect the lower revenue from petroleum-derived sources, and forced the ringgit to decline 18 per cent against the US dollar last year.