BANK Negara Malaysia has reported that the household debt to gross domestic product (GDP) ratio has risen to a new peak of 93.3% as at December 2020, from the previous record high of 87.5% in June 2020. According to the 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. It 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 RM 3,000 a monthly were stretched financially with low financial buffers and 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.

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

What is the way forward?

Certainly, the 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 (RM 10.3 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 pandemic 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 is not enough. We need a social safety net to support households for a longer term.

This should automatically provide targeted financial assistance to households under distress due to 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, in 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 having low savings, not being prepared for financial emergencies, high debts, not being prepared for retirement, and not being sufficiently protected through insurance for emergencies.

The pandemic has clearly shown the consequences of this. 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 indeed of serious concern for all Malaysian workers and consumers. It is our hope that positive and concrete measures are taken by government to address the rakyat’s current and future needs. – April 20, 2021.

*Paul Selva Raj is Federation of Malaysian Consumers Associations secretary-general.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.