Financial risks, household debts and lower income households

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We should always be mindful that high household debts vs the GDP is dangerous to the economy. Everyone tells me this all the time. This is especially when the household debts are growing faster than the economy which meant that one day in the future, it may be higher than the GDP. So, the trick is to slow the household debts growth (focus on quality and not quantity) or to increase the GDP growth (easier said than done) Let’s look at two countries which are most often associated with Malaysia. One’s next to us and another’s on top of the migration thought. Singapore’s household debt as at Q3 2017 to the GDP is only 58 percent and I think everyone would agree that when people need a safe investment haven in South East Asia, the top choice may just be Singapore. Meanwhile, Australia’s household debt to GDP is 121 percent as at Q3 2017. It’s highest was 123 percent in Q4 2016. Malaysia’s household debt is somewhere in between these two.

Let’s look at Malaysia’s assessment as per the Bank Negara Malaysia (BNM) Financial Stability and Payment Systems Report 2017. If you like to refer to the full report which covers a whole lot more stuffs, please click here for the PDF report. 

The global economy and financial markets were influenced by major policy developments in several key economies, volatility in commodities markets and geopolitical risks. (The major policy developments stated here has yet to include Trump’s comments about trade imbalance with China. Commodities market includes a major produce called oil. Yea, the prices fluctuate non-stop… The last would be the risks from all those potential confrontations between countries. Well, at least we learnt today that Kim Jung Un met Xi Jin Ping just days ago and there’s an upcoming summit between the North and the South Koreas. Positive developments I would say) 

Despite all these happenings, BNM says that the domestic financial stability continued to be firmly supported by sound financial institutions, and deep and liquid financial markets which facilitated the smooth functioning of financial intermediation activities.  Indicators of market, liquidity and funding risks were lower. Risks to financial stability from elevated household debt levels continued to recede. (Positive comments. In brief, the banks still have money to lend, as long as one qualifies for one. Many analysts say that the rates would not be increased again this year but let’s just see how it goes yeah.) 

The growth in household borrowings moderated for the seventh consecutive year and is now more in line with income growth. Against the stronger performance of the domestic economy, the ratio of household debtto-gross domestic product declined further to 84.3% (2016: 88.3%).  (Okay, it’s lower but as we can see this is still high when compared to Singapore for example) 

Underlying trends in debt accumulation by households also continued to improve. First, the growth of unsecured borrowings in the form of personal loans has been sharply lower than that observed in earlier periods (2017: 2.5%; 2008: 25.2%).  (This is super important. when the borrowings are unsecured, any sudden changes meant even the financial institutions are rattled. When the borrowings are secured, then at least banks could still take steps to recover some portions of the debt) 

Second, the debt servicing ratios of most households remained within prudent levels (median: 32.7%). (Positive… definitely. Well, for people with this percentage, it meant also that most probably the bank would lend you more when needed)

Third, the growth in household financial assets (8.6%) outpaced that of debt for the first time since 2012. (Positive) 

Not all are positive yeah. The lower income households could continue to face challenges in meeting debt repayments amid higher costs of living. Given that debt levels are still elevated, the series of macro prudential measures implemented since 2010 remain relevant in their current form. (I firmly believe assistance should be continuously given to the lower income households but more importantly would be steps to elevate their earnings too. Hopefully everyone is flexible to learn, apply and move up.) 

In the financial markets, a number of factors are contributing to greater stability. A larger proportion of non-resident investors in the bond market are stable, long-term investors.  (This is positive yeah. We do not need speculators. We need long term investors…) 

Strong domestic institutional investors continue to provide the necessary support to domestic financial markets during periods of heightened portfolio flows, thus preserving orderly market conditions. (Yes, I still love shopping even if many people are saying that the retail sector’s numbers are not healthy) 

Following three series of measures introduced by the Financial Markets Committee (FMC) since December 2016, onshore foreign exchange (FX) liquidity has also improved, driven by a more balanced foreign currency demand and supply. (Remember this? When many were against this move? My comments earlier here.) 

Full report from Bank Negara Malaysia’s website here. 

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Happy working harder and earning higher yeah. The next investment is waiting for our money. Cheers

written on 28 March 2018

Next suggested article:  Up 25 basis point, low interest days over?

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