This article first appeared in Forum, The Edge Malaysia Weekly on March 25, 2024 - March 31, 2024

Stubbornly high household debt is a reason why reforms are necessary in the highly subsidised Malaysian economy.

One cause of the high household debt is the prolonged low interest rate environment. There really is no push for households to reduce their debt when their monthly commitments are well managed, helped by low interest rates.

Malaysia’s household debt as a percentage of the economy has generally been above 80% since 2012. According to Bank Negara Malaysia’s latest report, household debt as a percentage of gross domestic product (GDP) was 84.2% as at last December, inching up from 81% a year earlier.

The figure has gone up gradually in the last 15 years or so. In 2009 and 2010, household debt as a percentage of GDP was 76%. It only moved into the 80% band in 2012, when Datuk Seri Najib Razak was prime minister. It must be noted that the rising household debt was no fault of Najib, who is now in jail for convictions related to 1Malaysia Development Bhd.

It is instead the outcome of the global easy monetary policy that arose as a result of the liquidity and financial crisis in the US.

The US, which is the world’s biggest economy and largest capital market, embarked on an almost-zero interest rate regime in 2009/2010 to save its banking system and economy. That was the start of the cheap money environment globally.

In many ways, it benefited Malaysians as a whole.

Before the US Federal Reserve embarked on an accommodative monetary policy, Bank Negara’s overnight policy rate (OPR) was hovering between 3% and 3.5%. When the US dropped interest rates, the central bank followed suit. At one time, when the US and other developing nations kept their borrowing rate at almost 0%, Malaysia’s OPR was 1.75%.

For Malaysians, the 1.75% OPR was generous. It increased the affordability levels of houses and cars significantly. Those earning more than RM5,000 could easily afford a mortgage payment as well as monthly hire purchase instalments.

However, the Fed started raising rates aggressively from March 2022. From almost 0%, the rate is now at between 5.25% and 5.5%, the highest in 23 years. The hikes made within 18 months were aimed at quelling inflation, which hit a 40-year high in early 2022.

Bank Negara’s OPR also inched up, but it did not have to be aggressive to match the Fed’s hikes. The reasons are simple.

Firstly, Malaysia’s inflation rate has been rather subdued as the economy is highly subsidised. Water, electricity, petrol and essential food items are subsidised. This keeps a lid on inflation levels, unlike in other countries where the prices of food items can go through the roof.

Secondly, Malaysian businesses and households cannot afford to manage their affairs in a high interest rate environment. Even with the OPR at 3%, the actual lending rates imposed by banks are easily double that for borrowers with good credit ratings.

The riskier borrowers end up having to manage with a higher interest rate cost of 8% per annum or more.

One of the outcomes of keeping interest rates relatively lower than those of developed countries such as the US is a weakening ringgit.

The weak ringgit has turned into a political issue. However, the reality is that a stronger ringgit without fundamentals and structural reforms will bite into the real economy and hit the people’s pockets hard.

High household debt is part of a vicious cycle in the country.

The low interest rate environment does not motivate households to instil financial discipline. Bank Negara has no reason to increase the OPR, a move that would help strengthen the ringgit, because inflation is low.

Inflation is kept low because of blanket subsidies. And the government cannot just remove blanket subsidies without implementing a system that ensures the poor are not affected and the general income levels improve.

Bank Negara governor Datuk Shaik Abdul Rasheed Ghaffour said during the release of the central bank’s annual report last week that there was a window of opportunity for Malaysia to undertake structural reforms.

He is right as Prime Minister Datuk Seri Anwar Ibrahim has come to power without any baggage. Unlike previous prime ministers who rose to the position after years of serving in the government, Anwar had been out of the system since 1998. He also has a two-thirds majority in parliament.

On paper, he should be able to carry out the structural reforms.

Anwar’s government is looking at removing the blanket subsidies. The ultimate objective is to put more money directly into the hands of those in need of subsidies. The task has fallen on Economy Minister Rafizi Ramli.

Apart from subsidies, the government also targets to cut down spending and improve foreign direct investments (FDI). On that score, Anwar has a track record of being able to charm investors. The question is when the FDIs will start flowing in.

In addition, domestic investors should be encouraged to put some money into the country instead of looking for opportunities outside. For that to happen, Malaysians, especially the non-Malays, must feel confident that there will always be a place for them here.

Talk of boycotts and strong statements by leaders such as Umno Youth chief Dr Muhamad Akmal Saleh do not help assuage the non-Malays’ sentiments. Some view the country as a place to make a living and not for making long-term investments.

FDIs and domestic investments are crucial to helping sustain economic growth, create jobs and improve the overall well-being of the people. They bring about the creation of a resilient economic model without the need for blanket subsidies.

Coupled with a disciplined handling of public funds, this will eventually lead to a better household debt-to-GDP ratio and a stronger ringgit.

https://www.theedgemarkets.com/node/705769