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M'sia's middle-income blues

Publication Date : 24-05-2014


The imminent increase in interest rates has caused anxiety among some Malaysian households, as the prospects of higher repayments for their outstanding loans will likely put further strain on their spending power.

As it is, many in the country are already feeling the impact of rising inflation eating into their disposable income, leaving them with less to spend on each month.

One such household is that of sales executive Agus Mahmud, 42.

The father of three, who is the sole breadwinner in the family, currently has two housing loans for two separate properties in the Klang Valley on top of some credit card debts.

“If interest rates go up, my family’s budget will definitely be affected, as our monthly obligations will increase,” Agus tells StarBizWeek.

“We’ve already been very cautious with our spending these days as the prices of most things have gone up. If the interest rates were to increase, we would likely have to cut down our expenses further,” he adds.

Audit executive Diana Lee, 34, shares the same sentiment. She says: “I increasingly find that I do not have much of my income left after settling my monthly obligations and regular expenses.”

“So, interest rates hike is definitely not good news to me,” adds Lee.

Lee, who is still single, recently bought a house under mortgage.

While Agus belongs to the upper middle-income households, those earning between 4,000 ringgit (US$1,245) and 7,000 ringgit per month that make up 13% of the country’s population, Lee falls under the more disadvantageous group of those earning less 4,000 ringgit per month.

Data provided by the Performance Management Delivery Unit (Pemandu), which is the special government agency tasked to drive Malaysia to high-income status by 2020, show a sobering fact – about 80% of households in Malaysia are currently earning less than 4,000 ringgit per month.

Vulnerable groups

Amid the rising inflation and a potential interest-rate hike, the low-and-middle-income earners are easily seen as the most vulnerable.

“The low and middle income earners will likely feel the impact the most, especially if everything happens at almost the same time – the electricity hike, fuel hike, higher prices of natural gas and so forth,” says Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias.

“However, while low-income earners will be somewhat compensated by government measures such as BR1M and the absence of income tax, the middle income group will be affected more on a relative basis as the latter does not receive as much compensation as the low-income group, and they are subjected to income taxes,” Zahidi explains.

The middle-income group, defined as those earning between 3,000 ringgit and 7,000 ringgit, accounts for about 40% of total households in Malaysia based on 2012 statistics. It is noted that middle-income households tend to have more housing loans than low-income households, which are made up of another 40% of the country’s population.

Debt-fuelled consumption

The combination of low interest rates and easy access to credit in recent years has encouraged many households in Malaysia to borrow against their future income to finance their present consumption. And that, to some extent, has contributed to the country’s economic growth.

A similar trend is observed in Asia, but Malaysian households have turned out to be one of the most heavily indebted in the region.

“Certainly, easy access to credit and low interest rates has helped fuelled private consumption growth, which ultimately contributes to the country’s economic growth,” explains Alliance Investment Bank chief economist Manokaran Mottain.

“But credit-fuelled growth is definitely not a sustainable trend, especially when you have household income growth that is not keeping pace,” he says.

At 86.8% of the country’s gross domestic product (GDP), Malaysia’s household debt level is the highest in Asia, slightly ahead of South Korea’s household debt level at 86% of its GDP, and Singapore’s 77% of GDP.

Malaysia's central bank, Bank Negara concedes that Malaysia’s household debt level is not likely to come down anytime soon, as demand for credit is expected to remain strong over the next few years, driven by a young labour force and increasingly affluent urban population.

Statistics show the bulk of Malaysia’s household debt is made of home-mortgage loans, as households take advantage of the prevailing low interest rates to buy properties, leading to increased demand, and eventually, the significant increase in property prices in the country in recent years.

But rising household debt level can be a cause for concern, economists note, as it makes households more vulnerable to the risks on an economic shock that could affect their debt-servicing capability, and hence, their future consumption. The good news is, such risks seem remote as of now.

The looming interest rates, however, will have implications for consumers, as mortgage rates, which in Malaysia is pegged to the base lending rate (BLR), will rise in tandem, while future hire-purchase and personal loan rates will also increase.

The expectations of an interest rate hike have been rising since Bank Negara sent out the clearest signal early this month that it might have to adjust the degree of monetary accommodation to address the continued build-up of economic and financial imbalances in the country so that these risks do not undermine Malaysia’s growth prospects.

Most economists expect the overnight policy rate (OPR) hike to take place when Bank Negara’s Monetary Policy Committee (MPC) convenes its next meeting on July 10.

Bank Negara has left the OPR unchanged for the past two years. The last revision took place in May 2011, when the MPC decided to increase the OPR by 25 basis points (bp) to 3%.

Minimal impact

According to economists, the impact of an interest rate hike on households will ultimately depend on the quantum of the rate increase.

A 25 bp increase to the benchmark OPR from the current 3% to 3.25% – which is what is widely expected by the financial community – is unlikely to cause any serious dent, economists argue.

“Based on our assessment, many households will likely be able to absorb any increases in debt obligations arising from a 25 bp increase without experiencing any severe circumstances,” Manokaran says.

“And at a higher rate of 3.25%, we think the OPR is still accommodative to growth,” he adds.

Zahidi concurs, saying, “The impact will not be that significant although consumers will still end up paying slightly more for their mortgages and future hire purchases.”

“But if another hike takes place, pushing the OPR up by 50 bp (from the current level), then the impact on consumers will likely be more pronounced and this may lead to further moderation in private consumption growth,” Zahidi argues.

Economists in general do not expect Bank Negara to take a too aggressive stance on its monetary policy, given the negative implication on the country’s economic growth as a whole.

Expecting Bank Negara to make only gradual adjustments to the country’s policy rate, RAM Ratings Sdn Bhd head of research Kristina Fong notes that “the central bank has embarked on a very holistic approach to their policy rate decision.”

“Any decision made by Bank Negara would have been well assessed so as to avoid any adverse impact on growth sustainability,” she argues.

Sharing the same sentiment, Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid says: “We do not subscribe to the idea that the central bank would aggressively tighten its monetary stance. A 25 bp hike would be sufficient enough at this juncture since growth in the second half of the year is expected to moderate on account of the implementation of subsidy rationalisation.”

Economists reckon that the prolonged period of low interest rates in Malaysia is a major driver of rising household debts in the country. The low borrowing costs have also encouraged many households to use borrowed funds to invest in speculative activities to seek higher returns, as partly evidenced by the significant increase in asset and property prices in the country in recent years.

“The adjustment in OPR is necessary to avoid risks of financial imbalances becoming more entrenched as the existing macro prudential measures have yet to exhibit significant slowdown in lending to household,” Afzanizam explains.

Drawing an example from the collapse in the US subprime mortgage, which subsequently led to the 2008/09 global financial crisis, Mohd Afzanizam argues that there are always dire consequences of keeping interest rates too low for too long.

“The recent outturn of GDP growth data clearly suggests that Malaysia’s economy is on firmer footing, and therefore, any forms of economic stimulus (which include low levels of interest rates) should be withdrawn in order to ensure growth remain sustainable,” Afzanizam says.

*US$1 = 3.21 ringgit


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