Debt ridden Malaysia may stall when easy money dries up - analysts

KUALA LUMPUR - More Malaysians are borrowing to buy anything from houses and cars to daily essentials, prompting global banking giant HSBC to label the country’s household debt level as “troubling” in a research note.

HSBC also pointed out that Malaysia’s household debt relative to its gross domestic product (GDP) is — along with that of Thailand and Taiwan — higher than that of the United States.

According to a report in the Wall Street Journal (WSJ) today, asset prices have been buoyed while the cost of borrowings have fallen due to the huge amounts of capital flowing into emerging Asian economies like Malaysia.

But the report pointed out that when the flow ends, Malaysia and others like it will find it hard to cushion the blow because of high household debt and government borrowings.

With interest rates lower than inflation, the number of people borrowing money has spiked in Malaysia, Hong Kong, Indonesia, the Philippines, Singapore and Thailand.

Much of the borrowed money has ended up in property investment.

This, in turn, has caused property prices to spiral upwards, forcing Malaysians to borrow more in a vicious loop.

“The issue is troubling,” WSJ quoted Frederic Neumann, co-head of Asian economic research at HSBC, as saying.

“It implies that consumer spending is to a large extent driven by leverage, and hence, sensitive to a tightening in financial conditions, whether because of regulatory scrutiny or a broader rise in funding costs.”

In a warning of the worst-case scenario, it was noted that rapid capital outflows could cause currency devaluations, push up interest rates and trigger credit defaults.

The WSJ report also highlighted the point that when foreign investors flee, even developed economies face risks.

While it runs a current-account surplus, Malaysia borrows heavily offshore, with gross external debt of US$117 billion.

Household debt in Malaysia is now 87 per cent of GDP compared to just 66 per cent in 2007.

The WSJ report noted that if interest rates rise and the ringgit falls, capital outflows would likely push up borrowing rates and make life very tough for indebted households.

The government, it said, would also have less room to offset any shock to the economy by spending its way out of trouble.

Malaysia’s economy is largely driven by domestic consumer spending, but economists have warned that it cannot continue to depend on this due to the increasing debt burden on Malaysians.

Despite surging inflation, Bank Negara Malaysia has also not reviewed interest rates since 2011.

Raising interest rates could jeopardise Putrajaya’s targeted growth of 6 per cent annually until 2020 in order for the country to reach developed nation status by the self-imposed deadline.