MPU 3353 personal financial planning in Malaysia

PETALING JAYA: Pressure is building up in the household debt space and may worsen this year as the Covid-19 coronavirus further bites into the economy. The economy is expected to contract the worst case scenerio by 2% and in the best case scenario by a growth of 0.5% based on Bank Negara’s projection.

The World Bank recently said Malaysia’s gross domestic product (GDP) would contract by 0.1% while its lower case assumption is for a contraction of 4.6% for this year due to the pandemic. Malaysia’s household debt to GDP is among the highest in Asia and has exceeded those of several high-income nations including the United States (66%) and Japan (59.3%).

The country’s household debt to GDP last year stood at 82.7% against 82% in 2018. It peaked at 86.9% in 2015. Economists agree that pressure would build up in the household debt to GDP segment amid the pandemic and contraction in the economy. The extension of the movement control order (MCO) to April 28 and the move to allow selected economic sectors to operate in stages though it bodes well, nonetheless will still put a strain on household debt.

AmBank Group chief economist Anthony Dass told StarBiz(pic below) that with a much slower GDP outlook for 2020, balancing between technical and full fledged recession, the pressure is on household debt to increase. “Our sensitivity analysis shows the household debt/GDP could range between 82.3% and 88.6% this year and GDP to grow between 0.4% to minus 2%. “Hence the possibilities for household debt/GDP to surpass the 86.9% in 2015, much depends on what rate the GDP and household debt are growing”, he said.

Rising level of household debt is a concern as it is a potential risk to macroeconomic and subsequently, financial stability, Dass said. Household income, he added would be affected from this virus impact, let alone their balance sheet. “The measures unveiled by the government and the central bank are expected to provide some short-term relief to households. The question is what is going to happen after the six months loans repayment moratorium period? Will there be a need to look at new measures if there are still signs of household debt pressure?” he asked.

OCBC Bank economist, Wellian Wiranto (pic below) said there is a high possibility for the household debt to pick up this year given the ongoing economic challenges, after years of decline led by adoption of prudent policies. One factor, he said is the denominator effect, given the possible contraction in the economy that would push up the ratio even if household debt itself stays the same. “To some extent, the loans repayment moratorium will help in terms of short-term liquidity needs of households, but some uptick in joblessness is to be expected and would inadvertently complicate matters. While the initial RM250bil package might be deemed overly focused on businesses, the government has rapidly remedied the situation by offering a supplementary RM10bil package recently focusing on SMEs. Together with the cash handouts to lower income groups that were previously announced, the preservation of livelihoods even as the country has to go through MCO to preserve lives should in turn help to cushion the blow for the segment of the society. As much as these policies will help, there will nonetheless be potential gaps that result in a pick-up in household indebtedness”, Wellian noted.

Household debt, according to UOB Research senior economist Julia Goh would stay elevated as loan repayments are deferred. At the same time, while some cash strapped households may require further credit assistance and businesses draw down credit lines during this period of uncertainty, she noted. However, we don’t think household debt levels will return to earlier peaks given that the central bank has not relaxed macro prudential measures implemented in the recent decade that worked to avert excessive credit risk. Furthermore, given the dismal economic and job outlook, credit demand will also be weak”, she said. Goh added that risks associated with household debt is concentrated among low income earners of less than RM3,000 a month and those with variable incomes.

Meanwhile, Bank Islam chief economist Mohd Afzanizam Abdul Rashid(pic below) expects household debt to GDP to remain stable. He said this is premised, among others, on the cautious view adopted by banks as credit underwriting standards would be more stringent in view of a challenging economic environment. At best, he added that banks would be focusing on the existing customers with good payment history and stable employment.

Question 1

Identify any FIVE (5) household debt loans that affected by the Covid-19 crisis.

(50 marks)

Question 2

Discuss any TWO (2) risks face by consumer during Covid-19 crisis.

(20 marks) 

Question 3

Discuss any TWO (2) lessons learn from Covid-19 crisis, from personal financial perspective.