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       PETALING JAYA: Household debt is a growing concern and could pose a problem for consumption growth if wages do not increase fast enough.

       Most Malaysian households had been bogged down by high debt even before the Covid-19 outbreak in early 2020 globally and the slowing economic growth from the Covid-19 pandemic were among the key reasons that have contributed to high household debt, according to economists.

       Socio-Economic Research Centre (SERC) executive director Lee Heng Guie said the country’s household debt had been a growing concern even before the Covid-19 pandemic.

       He said Bank Negara has been relentless in its efforts to contain the country’s household debt, as it is one of the highest in the region.

       “High household debt does not necessarily translate to weak consumption. What we need to pay attention to is borrowers with a monthly income of less than RM5,000 who are at risk of any potential shocks,” he told StarBiz.

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       Lee said within the region, Malaysia had one of the highest household debt-to-gross domestic product (GDP) ratios at 89%, compared with 9.9% in the Philippines, 17.2% in Indonesia, 69.7% in Singapore and 89.3% in Thailand.

       According to Bank Negara, Malaysian household debt had swelled to nearly RM1.40 trillion as of June 30, 2021, exceeding the federal government’s debt. This is on the back of an adult population of 21.8 million in Malaysia.

       The Covid-19 pandemic further exerted pressure on household debt that jumped almost 17% between 2018 and 2021, which could impact consumption risk due to high debt-servicing responsibilities.

       “High household indebtedness will certainly constrain household spending, especially if income does not increase.

       “More concerning is that highly indebted households and individuals will face a higher likelihood of financial distress in the event of changes in economic conditions such as loss of employment or an increase in interest rates,” said Sunway University economics professor Yeah Kim Leng.

       He warned that a rise in interest rates would impact consumer consumption growth, as individuals or households will have to cut spending due to a higher debt servicing burden.

       In the first half of 2021, the largest share of household debt was mortgages, which accounted for 58% or RM812bil, followed by consumer loans at 16% or RM224bil – personal and credit cards. Car and other vehicle loans totalled 12% or RM168bil.

       It is worth noting that in the past decade, the government has been pushing for the home ownership programme as well as the affordable housing agenda through various financing schemes such as My First Home, Youth Housing and MyHome.

       Yeah said that while the push for home-ownership inevitably results in a persistent high household debt level, it is not a growing concern as the property values remain intact.

       “As long as the asset or property value remains intact, and the debt servicing ability of the borrowers are not impaired, the current high household debt level will not threaten the country’s economic and financial stability,” he noted.

       Bank Negara has kept its overnight policy rate (OPR) at 1.75% since July 2020, when it cut the rate from 2% to support economic growth that was affected by the Covid-19 pandemic and movement control orders to curb the infection rate. The OPR at 1.75% is at the lowest since 2004.

       Granting loans at a low interest rate may ease the burden temporarily during the Covid-19 pandemic, but is not sustainable for the longer term.

       Lee of SERC pointed out that a prolonged low interest rate environment could be detrimental to the economy due to credit-fuelled consumption.

       “Keeping interest rates low for too long is not good, as we cannot continuously borrow on credit to support spending,” he added.

       He said consumers need to look into their spending habits, be disciplined in their savings, and not focus only on short-term spending needs.

       Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said Malaysians needed to beef up their knowledge on financial literacy.

       “Bank Negara has recognised the problem and has taken the necessary steps to control it. Given that, it is only fair that borrowers would also need to step up their level of financial literacy,” he said.

       Despite the worrying level of household debt, Afzanizam said consumption strength among Malaysian households remained resilient.

       According to Bank Negara, the debt services ratio (DSR) for newly approved and outstanding loans remained steady at 44% and 35%, respectively in June 2021.

       “After taking into consideration the loan repayment, the disposable income is still fairly good.

       “Meanwhile, those borrowers who have a DSR of more than 60% were generally earning a monthly income of more than RM5,000. This would mean such borrowers would have more buffer, given their income size.

       “While the household debt ratio has remained elevated, the repayment capacity is still intact with the impairment ratio continuing to remain stable at 1.03% as of December 2021 (December 2020: 1.09%).

       “Given that, the prevailing household debt ratio should not impede the strength of Malaysian consumers,” he told StarBiz.