Malaysian households are piling on debt, with household debt-to-gross domestic product (GDP) rates exceeding United States (US) levels, global research house McKinsey Global Institute said.  

While the government has capped its own debt-to-GDP ratio at 55 percent, Malaysia’s 76 percent household debt-to-GDP ratio puts it among seven countries “most vulnerable”, it said.

Malaysia and Thailand were singled out because their household debt is comparable to advanced economies like the US and United Kingdom (UK), despite having a much lower income.

“These figures suggest potential risk, but do not signal imminent crisis. The creditworthiness of borrowers, the ability of lenders to assess risk and the state of the macroeconomy will all influence the outcome.

“Nonetheless, these countries should, at minimum, be monitoring the situation very carefully,” it said in the report ‘Debt and (Not Much) Deleveraging’ released yesterday.

Malaysia’s household debt-to-GDP ratio grew seven points from 139 in 2007 to 146 in the second quarter for 2014, it said.

In comparison, US household debt levels for the second quarter of 2014 was 99 while in the UK it was 133. Thailand’s debt level for the same quarter was 121.

Malaysia’s debt service ratio – a measure of portion of household income spent on paying loan principal and interest – is 44 percent, the highest among the 22 countries in developing and advanced economies surveyed.

Household debt is correlated to house prices in Malaysia – a trend evident in the US prior to the 2008 financial crisis - but house prices have risen at a higher rate compared to household debt, it said.

Bank Negara: It’s under control

 

Bank Negara Malaysia’s (BNM) 2013 Financial Stability Report and Payment Systems Report notes that the central bank expects household debt-to-GDP ratio in Malaysia to “remain elevated over the next few years”.

“Demand for credit is likely to remain strong, particularly from the relatively young labour force and more affluent population settling in urban centres.

“As measures by the Government to increase the supply of affordable housing and improve public transportation, along with current measures to keep lending practices in check, take firmer hold, the level of household indebtedness should start to moderate,” BNM said.

It also cautioned financial institutions to practice sound lending practices by lending only to those who can pay.

The 2014 Financial Stability and Payments Systems Report is expected to be released next month.

However, in its second quarter 2014 bulletin , BNM said the household debt quality remain sound.

Only two percent of loans taken up by households are in arrears between one or two months while 1.2 percent are impaired.

Aggregate household debt grow by 10 percent between 2013 and 2014, it said.

It noted that lending to the household by non-bank financial institutions, like housing societies, is growing and accounted for RM897.8 billion in that quarter.

These personal financing was used to pay off mortgages, vehicle loans and credit card balances, it said.

 

“The Bank continues to maintain a high degree of vigilance over the lending practices of financial institutions, including the personal financing segment,” it said.