WE have been on a consumption and spending spree, and to use the human body as an analogy, our vital signs are emitting warning signals we can no longer ignore.
From households to corporates, as well as at both the federal and state levels, Malaysia is a nation in debt, spending more than we earn on the back of easy and abundant credit and a shocking lack of financial discipline.
It does not help that the country and most of its people are caught in the middle-income trap, with salaries not rising fast enough to catch up with the rising cost of living, especially the prices of assets like the roof over our heads. Most people, therefore, are forced to gear up and seek loans with a longer tenure.
But the bottom line is still the same — debt has to be repaid and the higher the proportion of your monthly pay cheque that goes to servicing debt, the less money you will have left over, to spend and save for the future. This applies to individuals, companies and governments.
And because a large portion of households are finding it hard to deal with the rising cost of living, the government has had to continue with its multi-billion ringgit subsidy programme, and give regular handouts — thus punching a bigger hole in the government's finances.
As it stands today, the public debt level (including government guarantees) as a proportion of the country's economy (gross domestic product), is double the 31.9% before the 1997/98 Asian financial crisis.
Household debt to GDP of 83%, compared with 70% in 2009, is among the most worrisome in Asia. Further details, like how many households have taken on too much debt in Malaysia, is not publicly available, and Bank Negara Malaysia declined to comment, when asked.
The Monetary Authority of Singapore (MAS), on the other hand, disclosed on July 23, that 5% to 10% of households in the island state, "could have over-extended themselves, fuelled by low interest rates and stretched loan tenures". It added that if mortgage rates were to rise by three percentage points, the proportion of risky borrowers — those with more than 60% of its income going to service debts — could rise to 10% to 15%.
While similar figures for Malaysia are unknown and sensitivity analysis is tough to do, owing to lack of detailed data on sub-categories of borrowers, Chua Hak Bin, Bank of America Merrill Lynch's (BaML) head of emerging Asia economics, reckons that previous Bank Negara statements suggest that civil servants may have also overextended themselves on debt, but declined to speculate further.
A Kuala Lumpur-based research head, however, reckons, "the Malaysian situation could be worse than in Singapore, particularly for the lower-paid civil servants and the lower income group of the population", as not only is Singapore's household debt-to-GDP level of 77.2% slightly lower than that of Malaysia, income levels there are also higher.
According to the Statistics Department, 80% of Malaysia's households earn less than RM5,000 a month and, thus, can ill afford mortgages for a 30-year loan on a RM500,000 property that costs RM2,460 monthly to service at 4.25% interest (BLR minus 2.25%), but would cost RM3,193 a month, at the prevailing base lending rate (BLR) of 6.6%.
"I don't think it is useful to guess, without further information, what the corresponding debt situation in Malaysia might be. But our political leaders need to explain and communicate clearly, what all these mean to the Malaysian public. Fear and uncertainty can needlessly and dangerously worsen any debt situation," says Danny Quah, professor of economics and international development at the London School of Economics and Political Science (LSE).
Quah adds that making the public more aware about the circumstances they're in, is "an important step in getting both the public and private debt situation in Malaysia under control". "The kinds of stress test evaluations those Singapore calculations provide, are extremely useful in keeping ordinary citizens informed," he says.
Nonetheless, Quah stresses that high public and private debt are never, by themselves, definitive of anything, although they provide useful signposts on general economic sustainability, when read together with other indicators.
"For instance, what might otherwise be a dangerous debt situation, could turn out to be benign, through the economy simply growing itself sufficiently, quickly. Conversely, if that growth fails to materialise, then even what initially appeared to be unremarkable debt ratios, can turn out to be unsustainable. This is arithmetic and is uncontroversial," he says.
"In our case, Malaysia needs to continue to keep its eye on generating sustainable growth, evading the middle-income trap. What happens in the global economy — Asia in particular — will matter importantly, not just for generating demand for Malaysia's exports, but to provide appetite for debt. But at the same time, both public and private debt in Malaysia need to be kept under control."
Among other things, there is no room for bad procurement practices and mismanagement of public funds and projects, as regularly highlighted in the Auditor-General's report, experts say.
"Proper controls will cut wastages and inflated costs, making every ringgit of government revenue and taxpayer money count toward higher impact economic activities, or aiding the lower income group," one analyst says, adding that the harder issue to address would be the size, and to upkeep cost of the civil service.
"If you cannot significantly reduce operating expenditure, then you have to increase your revenue sources … It's just like how if you've overleveraged on credit card debt, to a point where your income is not enough to make monthly payments, one way is to sell assets and significantly cut back on your living standards," he adds.
Meanwhile, Malaysian corporations — which turned more prudent on debt, since the Asian crisis — too have been borrowing more, alongside its Asian counterparts in the last five years, especially since 2010, on the back of the world's loose monetary policy.
"Increases in corporate leverage have been led by Singapore, Malaysia and Thailand, with modest increases in Indonesia and the Philippines," BaML's Chua writes in an Aug 2 note, to take stock of corporate leverage across Asia.
He calculates that Malaysia's corporate leverage — corporate bonds and bank loans — have already risen to 95.8% of GDP as at 1Q2013, compared with 79.9% as at 4Q2007.
"The turn in Asean corporate leverage is quite stark, as Asean companies were largely deleveraging since the Asian crisis, until about 2010 … How the corporate debt dynamics will play out over the coming years, will be important for growth and markets. Pressures are emerging in Asia, which could lead to a moderation in the rate at which corporate debt is rising," he writes.
Chua reckons that Asian companies, particularly those in Asean, may take a more cautious approach in raising borrowings, given the risk of sharply higher financing costs down the road, as the Federal Reserve's QE tapering could slowly lead to a normalisation of US interest rates, which is already being reflected in the jump, in long-end Asian yields.
While the more macro prudential measures introduced by Asian central banks to keep leverage measures in check, have largely been targeted at households, Chua sees selective ripple effects on corporate leverage.
"Ageing demographics in some Asian countries may also have implications for the debt dynamics, not least of which is slower potential growth, that could limit the extent to which companies can deleverage," he says.
Complicating matters for Malaysia is the near-term volatility on the ringgit, expected as funds are pulled from emerging markets like Malaysia, on expectations that the Fed will scale back its four-year bond-buying programme.
While RHB Research Institute's managing director Lim Chee Sing reckons that "it is too simplistic to say that Bank Negara will have to allow the ringgit to slide, as it can't lift interest rates, owing to high debt levels", he concurs that the ringgit's strength in the near term could be impacted by movements of short-term capital.
To be sure, economists are not flagging an imminent systemic risk from the high leverage ratios just yet, but they do think debt levels are high enough to be potentially destabilising, especially if left unchecked by governments and central banks. Already, Fitch Rating's revision of Malaysia's outlook to "negative" from "stable" in late July, is seen as sign that international investors may be running out of patience.
"Bank Negara may have to introduce measures ahead of the government, to contain the investment boom and surge in government guarantees," Chua tells The Edge, adding that more measures are likely necessary to contain consumer credit growth.
Sceptics, however, doubt Bank Negara will be given a free hand to do what's necessary: "As the saying goes, the central bank is independent only within the government," one seasoned economist says. "I don't think its hands are tied when it comes to raising the policy rate, although it has to justify convincingly to the prime minister, before it can do that," he adds.
In response to Fitch's revised outlook, Prime Minister Datuk Seri Najib Razak said on Aug 1, that the upcoming tabling of Budget 2014 on Oct 25 — which trails the Umno triennial party polls on Oct 5 — will contain measures to lower Malaysia's fiscal deficit, which officially stands at 53.9% of GDP, as at 1Q2013 (excluding quasi debt). This is just a shade below the 55% level that is deemed prudent, compared with 39.8% just five years ago, in 2008.
Najib has also committed to cutting Malaysia's budget deficit to 3% by 2015, and announced the setting up of a fiscal policy committee (FPC), for which experts want details fleshed out in the coming months.
Some analysts point out that Malaysia managed to emerge from previous crises in 1987 and 1997, and think the country still has time to make the necessary decisions.
"The budget deficit was over 10% of GDP in the early 1980s, and debt-to-GDP ratio was more than 100% in 1987, before the government took steps to progressively reduce its debt servicing burden," says a seasoned economist .
"But we [eventually] had several years of fiscal surpluses in the early 1990s, thanks to good control of expenditure, coupled with decent economic growth, so I wouldn't say things are too bad to be fixed. But we need to move quickly, and be upfront about matters. No more of all these off-balance-sheet nonsense and bad procurement practices."
This story first appeared in The Edge weekly edition of Aug 12-18, 2013.
Written by Cindy Yeap of The Edge Malaysia
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