In today’s economy, debt is like water. Too little of it the market becomes parched, spending and investment are cut. Too much of it, we risk drowning.
The last major global recession – the effects which we are still seeing today – whether in Europe or in the USA, was the result of this drowning. No one is able to run away when the mighty storm water comes, from individual bankruptcy to the foreclosure of private homes to a country bankrupt.
Thus, it is vital to manage debt. Managing debt should be Prime Minister Najib Razak’s main focus for the upcoming 2016 Budget.
Ordinary Malaysians have maxed out our “credit card”
Today, household debt stands at 87.9% of the GDP in contrast to around 60% in 2008. In an August 2015 report, Standard & Poor’s wrote that “Households are accumulating debt faster than their incomes are growing, which will likely lead to repayment difficulties…”
For comparison, Indonesia has a 15.8% household debt to GDP ratio, Thailand 30%, Hong Kong 58%, Singapore 67%, Japan 75% and Taiwan 82%.[1]
According to a 2014 statistics, 22,305 Malaysians were declared bankrupt that year for defaulting on their debts, an average of 61 persons a day.[2] Compare this to 2012 with 19,575 bankruptcy, an average of 54 persons a day.[3] There is almost a 15% increment in cases of bankruptcy in our country in the period of just two years. It takes a default of mere RM30,000 to be declared a bankrupt.
The situation is very dire for young Malaysians. A quarter of the bankrupts in 2014 are young Malaysians below the age of 35, double that of the number in 2005. In 2012, more than half (58%) of the bankrupts are Malaysians below the age of 44.
Our government too has maxed out its “credit card”
The government itself is not a good example when it comes to prudence. Today, Malaysia’s debt to GDP is at 54.5% (2014), inches away from the 55% ceiling set by the federal government.[4]
In 2013, government debt stood at RM539 billion or 53% to GDP. But this is not the full picture of our indebtedness. If “off-balance sheet” items are considered, then the total government debt in 2013 would be RM677.9 billion, or 67% to our GDP.[5 – Pakatan Harapan Alternative Budget 2016] This is way beyond the 55% debt ceiling set by the federal government itself.
In such a fiscal position, the government still expects to increase its spending under the Eleventh Malaysia Plan (11MP) with several mega projects in the pipeline.
Private sector investment fell drastically from over 30% of the country’s GDP in the 90s to less than 10% in 2007. In its place, the government became bigger and bigger spender.
Government services as an economic activity is expected to grow at the rate of 6.3% from 2016-2020. In 2010, government services was 7.8% of the GDP, today it is 8.8% (2014) and it is projected to increase to 9.0% in 2020. Civil service emolument will also grow at the rate of 6.7% against a lower GDP growth of 5-6% under 11MP.
The last time Malaysia saw a surplus budget was when Anwar Ibrahim was Finance Minister. Since his sacking, for the last 15 years, the federal budget has been in the deficit annually.
Credit-driven growth but no trickle-down effect on wages for ordinary Malaysians
While there is so much indebtedness, Malaysia is still experiencing economic growth. This may be some consolation to some people, but it is clear that our economy today is being driven by everyone spending beyond our means. In other words, we are an economy driven by credit.
But the graver problem with our situation is, even though some may argue that spending spurs economic growth, we do not see the fruits of such growth trickle down to ordinary Malaysians, especially young Malaysians.
Workers’ share as a portion of the GDP hovers around 31% from 2005 to 2013, while corporate profit is about 65%.[6 – National Accounts GDP Income Approach 2005-2013, DoS] In other words, for every RM100, workers get RM31, taukehs get RM65. It must be noted that the RM31 includes directors’ allowance, bonuses, commissions, fees and salaries. If we exclude high salaried directors, the percentage of wages to GDP of the low and middle level workers will be even lower.
This means, while the cake may be growing – there is overall economic growth – wage earners’ share is not getting bigger.
Compare our wage situation to that of other countries in the region such as Singapore (41.1%), Korea (43.7%), Taiwan (46.2%) and Japan (51.9%).
While the Prime Minister announced that now the average Malaysian household income has hit RM6,141 a month, statistics show much less glorious picture to say the least. A report by the Department of Statistics in 2014 showed that the average monthly income of Malaysian workers is RM2,052 and the median monthly income is RM1,500. This means, 50% of Malaysian workers earn below RM1,500 a month.[7 – Malaysia Salaries and Wages Survey Report 2013, DOS]
Data from the Employees Provident Fund (EPF) shows 62% of its active members earn less than RM2,000 a month and 96% earn less than RM6,000 a month.
More than one third of our workforce is young Malaysians below the age of 30. In September 2013, the government said that 83% of young Malaysians in that age group are earning below RM3,000. In a separate statistics by the government in November 2014, 67% of our young workforce (age between 15-24) are earning RM1,000 and below while 21% earns between RM1,000 to RM1,500.
In other words, a large portion of our young people who are in the workforce, aged 15 – 30 years old, would have qualified for one form of BR1M or another.
For the lack of space, I will not discuss another very serious problem faced by young Malaysians: unemployment. I have elsewhere written at length about this critical issue.
But I want to point out that, for the 161, 000 graduates aged between 20 and 24 who are unemployed, chances are, they have already incurred large debts from education loans.[8]
Deal with debt
Before the problem aggravates, we need to deal with debt. This should be done at two levels, one, to help ordinary Malaysians to reduce their debts and two, to ensure more fiscal discipline in the federal government.
Firstly, workers’ share of wealth should be increase in order to reduce dependency on credit. In this aspect, the Pakatan Harapan Alternative Budget proposed to review the minimum wage of RM900 to the level of living wage of RM1,200. Our dependency on migrant unskilled labour should be slowly weaned off to curb the competition to the bottom in the workforce.
Secondly, the government needs to cushion Malaysians from the rising cost of living. It has been said on numerous occasions, this is not the right time to implement the Goods and Services Tax (GST). The government has not exhausted its existing revenue base yet – from low collection of personal and corporate taxes, to the untapped capital gain tax to the plugging of various leakages to mention a few. By abolishing (or zero-rate, as per Pakatan Harapan’s proposal) the GST, ordinary Malaysians and the economy can at least breath a little, having the restriction on spending imposed by the consumption tax removed.
Thirdly, to deal with household debt itself.
Data from 2013 shows that major components of household debt comprised of property mortgages at 44.2%, followed by vehicle loans 17.5%, and personal loans 16.6%. Credit card outstandings is about 5-6%.[9]
Thus, In order to tackle the problem of high household debt, the government should deal with the high cost of housing and transport.
Government policy forced ordinary Malaysians into debt while enriching cronies who more often than not have a monopoly over these sectors. Think about major housing developers, banks, vehicle AP holders, petrol companies. Only a handful of companies are allowed to provide these goods and services in Malaysia making them highly uncompetitive.
Usually, these companies belonged to cronies of the ruling party.
We need to break this crony capitalism.
Take public transport for example. Presently the public transport system if any at all, protects cronies (think about taxi permits for example) and is inefficient, even within Klang Valley. A better, more decentralised model of planning and implementation of public transport is needed; one which encompasses a central planning authority for consistency, the different state and local authorities for local planning and implementation, new technology such as MyTeksi and Uber and a demand side management strategy.
With 1.4 million employees nationwide, the government must be the biggest employer in the country. Instead of subsidising vehicle loans to civil servants or encouraging private banks to do so, instead of the inefficient model of mileage claims, why not reallocate these resources into public transport to provide for civil servants, and consequently ordinary Malaysians.
As such, resources are channeled to a more purposeful, long term infrastructure development which will also eventually increase productivity.
Fourthly, to ensure stricter credit regulation a measure which the central bank is already implementing. This is to avoid ordinary Malaysians to be entrapped by offers of easy credit. The government needs to have the discipline to sustain such policy.
However, ordinary Malaysians need to be shielded from adverse effects of stricter bank regulation, for example, inability to take a mortgage. In fact, today, home buyers are complaining about the difficulty to get a loan for affordable housing. However, even the so-called affordable housing is but another way to enrich bankers and developers and forced ordinary Malaysians into the vicious cycle of indebtedness. Home ownership should be rethink. The tightening of credit should be complemented with for example, policy which promotes quality rented scheme for the people.
The government must be disciplined
On another level, the government itself needs to be disciplined in its fiscal policy.
Firstly, it goes without saying here in Malaysia, the low hanging fruit is to curb corruption and wastages, a measure which will save the federal government upto RM30 billion a year and returns the credibility and confidence to our economy.
Secondly, the government should have a long term spending strategy instead of just short term stimulus programmes which ultimately prove to benefit a smaller group of people, mostly the elites (such as corporate shareholders).
Even programmes such as BR1M are ultimately ineffective to resolve our problems in the long run. In the last three years, BR1M has not significantly improved the lives of its recipients. Given the high indebtedness, the water already up to the nose, additional money received may be used for debt repayment instead of to increase spending. Or merely to slightly offset their existing spending – the keyword here is “slightly”, putting a plaster on a large gaping gunshot wound.
Instead of short term stimulus, populist handout programmes and reckless spendings on white elephant mega projects, the government should invest in infrastructures which will promote a more vibrant private sector investment; better internet connection, better roads and public transport network, a more efficient utility system, community facilities to improve the quality of lives, and very critically at this juncture in Malaysia, better education and retraining programmes to meet the demands of the job market.
Finally, a long term strategy on our oil wealth is necessary to ensure that we pass on wealth and not debt to our future generation.