• Bait Al-Amanah

FMT Article: Increasing Household Debt-to-GDP highlights Vulnerability of lower-income households

Photo by FMT

The article written by Samuel Chua was published in Free Malaysia Today

PETALING JAYA: Malaysia’s household debt-to-GDP ratio has hit 93.35%. However, most households have the ability to repay their debts.

Benedict Weerasena of Bait Al Amanah pointed out that both the aggregate financial assets-to-debt ratio and liquid assets-to-debt ratio were higher than the “prudent threshold of 1 time”.

Liquid asset refers to cash in hand or an asset that can readily be converted into cash.

Weerasena explained that a ratio of 1 time means the total financial assets are equal to the total debt and, therefore, a household has sufficient financial assets to cover its debt.

“The higher the ratio, the more financial assets the household has compared to its debts, which in turn means they have enough financial health,” he told FMT.

Currently, he said, the aggregate financial assets-to-debt ratio is 2.2 times and the liquid assets-to-debt ratio is 1.5 times, according to Bank Negara Malaysia.

However, he said one major concern is the vulnerability of lower-income households who are already stretched financially, and will be at risk of defaulting on loans if there is another economic shock in the near future.

“This financial stress is further exacerbated by the uneven recovery in the labour market.

“With more vulnerable households affected by unemployment and underemployment, greater economic inequality is set to persist,” he said.

Weerasena said Malaysia needs to improve and expand social safety nets for vulnerable households in this unprecedented crisis.

He said one-off cash transfers should be reconsidered and replaced with target basic income provision for these households.

“For now, a blanket loan moratorium as a ‘one-size fits all’ solution is unnecessary. Instead, targeted repayment assistance measures tailor-made to the needs of each borrower are the best way forward,” he said.

Denison Jayasooria, an expert in poverty studies, said the higher debt ratio is understandable due to the current economic crisis and would likely pass in the coming six to eight months.

However, he also said the struggles of vulnerable households without a social safety net could become alarming.

“More data collection and analysis are required to identify how people become victims of formal or informal schemes which lead to situations where people are racking up higher household debt,” he told FMT.

Jayasooria said debts to loan sharks and money lenders as well as credit card debt could lead to more damage for low-income families.

“The government should increase enforcement on illegal money lending and create community-based savings and loan schemes through self-help groups and cooperatives to decrease the level of long-term debt,” he said.

Recently, opposition leader Anwar Ibrahim said the record level of 93.3% household income debt-to-GDP ratio at the end of 2020 is of concern.

He said there were people who were forced to seek more loans and take on more debt, thus condemning themselves to debt traps.

“This debt disaster will derail any hopes of Malaysia making an economic recovery in 2021, let alone in the next few years, if it is not confronted immediately,” he said.

He urged Prime Minister Muhyiddin Yassin to direct his economic team to think of a new strategy in easing the burden of the rakyat.

#FreeMalaysiaToday #MalaysianEconomy

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