Malaysia’s household debt may continue to rise, says Fitch

KUALA LUMPUR: Household debt in Malaysia, which reached 86.8% of gross domestic product (GDP) at end-2013, may continue to rise in the near term.

Fitch Ratings, in its comment on Bank Negara Malaysia’s (BNM) latest figures on the country’s household debt, said the rising trend will increase risks on at least two fronts.

“First, a sharp increase in macroeconomic volatility would affect households’ debt-servicing capacity. We expect the central bank to begin raising rates in 2014 in response to inflationary pressure stemming partly from rationalisation of government subsidy schemes.

“The impact of this tightening cycle will remain manageable. But the longer household indebtedness goes on rising, the lower the tolerance to economic shocks [other things being equal].

“Second, rising household debt could in itself eventually become a drag on growth, if and when Malaysian households decide to rein in spending and start strengthening their balance sheets,” the international rating agency said in a statement yesterday.

Fitch said the continued rise of household debt may pose downside risk to bank profiles and ratings. “The continued rise in Malaysian household leverage is a risk, although the banks have built satisfactory earnings and loan-loss reserve buffers that could help protect them against the risk of deteriorating asset quality.

“Tighter lending regulations and receding liquidity conditions should lead to a moderation in credit growth and temper the build-up of risks in the banking system.”

Fitch said Malaysia’s household debt is among the highest in Asia, up from 80.5% in 2012. The rise in household debt has been accompanied by property price appreciation in certain segments, notably high-rise urban housing.

Mortgages accounted for a quarter of bank lending assets, which continue to drive the growth in household debt.

Fitch said BNM has gradually introduced a range of regulatory measures aimed at tempering household borrowing and property lending. Last year, further regulation targeting property market speculation and personal finance were implemented.

“These measures should help moderate consumer loan growth, particularly against a backdrop of ebbing liquidity flows and higher global interest rates. There are signs this is already starting, with growth in household debt slowing to 11.7% in 2013 from 13.5% in 2012,” it added.

Personal loans, said Fitch, slowed to a more sustainable pace after the introduction of stricter regulatory measures in July last year. Personal loans have been growing rapidly in the five years up to 2012.

“These loans comprise 8% of household borrowing and 4% of banking sector loans, but can act as an early indicator of household sector stress as they tend to be accessed more by lower income households.

“A rise in personal loan delinquencies is likely to be accompanied by higher impairments in vehicle finance, which comprises a more significant 15% of banking system assets,” said Fitch.

The rating agency noted that the bulk of household debt, around 80%, is secured in nature, and pre-provision profitability is likely to remain healthy in the near term. The overall loan impairment remains low despite having started to creep up for personal loans and vehicle financing.

“The banks are also protected by satisfactory loan-loss reserves between 85% and 119% of gross impaired loans and core Tier 1 capital buffers of between 8.7% and 11.3% for the top three domestic banks.”

Fitch said the macroeconomic backdrop could limit the severity of any deterioration in consumer asset quality in the near term. “The brisk growth in household borrowing is backed by a robust economy, a steady job market and rising household incomes across a relatively young population base. We forecast GDP to grow by 5% and unemployment to remain stable at around 3% in 2014.”


This article first appeared in The Edge Financial Daily, on March 25, 2014.