LETTER | High household debt: Should we be concerned?

LETTER | Bank Negara Malaysia has reported that household debt to gross domestic product ratio has risen to a new peak of 93.3 percent as of December 2020, from the previous record high of 87.5 percent in June 2020. 

According to BNM Report, household debt growth was mainly driven by car, housing and personal financing loans.

Should we be concerned?

Generally, a high level of household debt can be risky. A high level of debt increases the sensitivity of households to any shock to their incomes. 

Also, during periods of financial stress, highly indebted households tend to cut their spending more than their less-indebted peers. This can make economic recovery more difficult.

Specifically, according to the BNM report, those earning less than RM3,000 a month were stretched financially with low financial buffers and a substantially higher debt to income ratio. 

Further, even borrowers earning less than RM5,000 monthly were showing signs of financial stress as observed from those seeking repayment assistance from the borrowing institutions. It has been suggested that these borrowers will continue to face challenges in 2021 due to the weak and uneven economic recovery.

Farther in a report by the Statistics Department in 2020, Malaysians were generally tightening their belts during the movement control order (MCO) period. The Department reported that household spending had effectively collapsed as it had dropped by 55 percent to just RM2,813 from RM6,317. Low spending will make economic recovery more difficult.

What is the way forward?

Certainly, the critical key is economic recovery to create and save jobs. Thus the report by the UN Conference on Trade and Development (Unctad) in February 2021, that foreign direct investment into Malaysia had plunged by more than two thirds to just US$2.5 billion (RM10.3 billion), the worst in the region was extremely worrying. 

This has serious implications not only for those seeking jobs in the current market, either because of job loss during the covid or seeking employment for the first time after school or university; this also has serious implications for future school leavers and graduates. There may simply be not enough jobs for future job seekers.

Secondly, we need to strengthen our social safety nets. Current irregular payments to those in distress are not enough. We need a social safety net to support households for a longer term. 

A social safety net should automatically provide targeted financial assistance to households under distress such as job loss or income loss, without the need for additional policy deliberation. 

A substantial part of their income is for essentials, food and children’s education, and as a caring nation, the social safety net should automatically cater for these essential needs.

Thirdly, we need to focus on financial literacy programmes. Even pre-Covid, consumers were managing their finances poorly. Poor management includes low savings rate, not prepared for financial emergencies, high debts, not prepared for retirement and not sufficiently protected through insurance for emergencies. 

Covid-19 has clearly shown the consequences of this financial situation. The use of EPF savings to pay for current urgent expenses, clearly indicates low income, and low savings to face emergencies. 

The use of retirement savings for current consumption has serious consequences for the future.

Thus the high household debt is of serious concern for all Malaysian workers and consumers. It is thus Fomca’s hope that positive and concrete measures are taken by the government to address the rakyat’s current and future needs.

PAUL SELVA RAJ is the secretary-general of the Federation of Malaysian Consumers Associations (Fomca).

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.