Malaysia: Too Indebted to Spend?

Many Asian households are dependent on debt, but Malaysia stands out as having both high household debt and relatively low GDP per capita. Other countries with high household debt, like South Korea and Singapore, are also relatively rich—having a high GDP per capita. And countries like the Philippines and Indonesia, which have relatively low GDP per capita, also have much lower household debt.

Malaysia’s household debt is especially high amongst those in its lowest income brackets. The bottom 40% of households makes approximately US$500 per month on average, according to a Malaysian think tank, the Khazanah Research Institute. Still, almost all Malaysian households own a television, 91% own a washing machine and 78% own cars. Since their incomes are so low, it’s quite unlikely they are paying for these items with all cash.

In Malaysia, like in many countries, those who can afford to pay cash for consumer goods, do so. Others choose to use a credit card, which may charge 15% to 18% APR. But for many Malaysians, using an installment plan is the only way to make a large purchase affordable. For example, a US$430 television is too expensive for many households to purchase with cash. Rather, consumers will opt for a payment plan that may work out to something like US$4 per week for five years. While many will appreciate how affordable this weekly payment sounds, they may not realize that the implicit interest rate they’re paying is over 45%.

In Malaysia, 18% of household income goes to make loan payments. When so much of household income goes to repay debt, it eventually hampers the ability to spend and save, and ultimately this can pose a burden on the economy. Think about an economy from a spending perspective. Suppose households are too indebted to spend. Without demand for their goods and services, companies may choose not to invest, so they won’t spend and could even lay off workers (who lack savings). That leaves the government’s balance sheet to keep the economic machine going. There’s only so much the government can borrow to invest (much less give out in subsidies, as is the case in many emerging markets), so if the government reaches a limit in its ability to borrow, it becomes difficult to see where economic growth comes from.

This situation could be a threat to Malaysia, but to its credit, the country has been working to reshape its economy while addressing these risks. To keep its economy on a strong footing, it has cut subsidies and cash transfers and raised taxes to redirect spending toward needed investments. However, to raise incomes and reduce household leverage, higher income jobs are needed. Malaysia will need to add skilled jobs, and the government will need to improve access to higher education to ensure that the children of today’s laborers become the engineers and technicians of tomorrow.

Satya Patel
Portfolio Manager
Matthews Asia

The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than large companies.

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