Why 94% of Malaysians are six months from a financial crisis

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Low levels of financial literacy and high costs of living mean many Malaysians struggle to save and invest for the future. This could create grounds for political and economic instability.

By Nicolette Chua, edited by Francesca Ross

Three out of four Malaysians are unable to raise RM1000 (US $235) in an emergency, a 2015 survey by Bank Negara Malaysia (BNM) revealed.

Only 6% of respondents were confident about meeting their financial obligations for at least six months if they lost their income, the same survey showed. Such dismal figures highlight a worrying trend.

Household debt in Malaysia is sky-high

Malaysia has one of the highest levels of household debt in the region with a household debt-to-gross domestic product (GDP) ratio of 88.5% as at end-2016. If it were to reach 100% then an average household would have as much debt as it does income. An acceptable figure for household debt-to-GDP ratio is up to 30%. Concerns have since been raised about the sustainability of Malaysia’s debt ratio at its current level.

Malaysians also claim to save. 82% of adults said they had saved money every year, according to the World Bank’s Findex (Financial Inclusion) survey. Only 34% of these people put their money into formal arrangements at a bank. This suggests Malaysians prefer to place their long-term savings in other institutions which offer better returns.

The Pilgrim Fund Board (PNB) and the Employees Provident Fund (EPF) have been popular choices, the Findex survey showed. This may be because the EPF is considered “by far the surest investment” in Malaysia as the government’s returns on deposits are virtually guaranteed. Middle-class Malaysians also invest in residential property and bank on appreciating prices to create wealth.

The problem for many is that by the end of the month there is often little left over to set aside. Housing loans and utilities made up almost a quarter (23.9%) of average total household consumption in 2014 (See Figure 1). This was followed by food and beverages (18.9%) and transport (14.6%).

Source: ASEANup

The rising cost of living has hit Malaysians hard

These high prices mean the cost of living has been rising faster than wage increases. Some large industries, such as the construction sector, still offer wages that lag behind overall inflation.

This income stagnation is a structural problem, say analysts. Malaysia’s national income is derived from low-tech and low-skilled manufacturing sectors as well as a commodity export economy. These sectors typically employ migrant workers who command low wages. This means Malaysians are also expected to accept lower rates.

This worries ordinary citizens. An article in the Malay Mail Online recently looked into the spending of three middle-income Malaysian families. After buying necessities and some small-scale spending all three reported a monthly maximum of RM1500 (US $353) left over. This was kept as emergency savings or education funds for their children.

This low capacity for additional expense means the government must control inflation to ensure citizens can manage their debt obligations. It is expected to hover between 3% to 4% in 2017, an increase of 2.1% from last year.

Business confidence has dipped amidst the 1MDB scandal

The impact of domestic politics on business confidence also affects saving rates. Business and consumer sentiment has slumped amidst the depreciating ringgit and rising unemployment. This slump in business confidence has pushed up the cost of living for Malaysians. The 1MDB saga has particularly taken a toll.

In 2015, the ringgit reached its lowest level since the Asian Financial Crisis –  4.04 MYR per USD. Analysts expect the outlook for the ringgit to remain bleak this year. This has meant higher prices for imported goods and services as businesses try to cover their costs.

Malaysians are susceptible to investment scams and impulsive buying

Few Malaysians are active, savvy investors. Only one in four held any form of investment, the 2015 BNM survey showed. This indicated that most Malaysians lack sufficient investment knowledge and financial preparation for the long term.

Paul Selvaraj, Deputy President Secretary-General of the Federation of Malaysian Consumer Associations (FOMCA) explained how a lack of financial literacy is a key issue. He said, “Individuals with low financial literacy are less likely to take calculated risks and invest their money in stocks.”

This lack of knowledge means many Malaysians have fallen prey to financial scams and lost their life savings. There were 1,883 reported cases of investment scams, totalling RM379.1 million (approximately US $89.1 million), between 2015 and April 2017.

There is also huge temptation to spend in a country where citizens are “always spoilt for choices, from food, entertainment or branded items” in the country’s ubiquitous malls.

Malaysia needs to deal with the challenges ahead

Malaysia’s tumultuous political landscape also influences the economy. Prime Minister Najib will soon need to campaign in an election and racial and power politics in that race could further dampen business confidence. The current administration has an approval rating of below 40%. This lack of faith sets the stage for a power battle with Malaysia’s opposition parties that could result in greater volatility for the economy. This would undermine Malaysian households’ ability to service their debts.

The best way to improve the precarious financial position of many citizens is to increase financial literacy. Bank Negara Malaysia has already committed to improving the financial education of consumers. Educational programmes for youths and adults are in the pipeline. Azaddin Ngah Tasir, head of Malaysia’s Credit Counselling and Debt Management Agency (AKPK), said around 20% more individuals sought financial advice in 2016 than the previous year. This amounted to 10,480 people as of June 2016.

Government support for the financial inclusion of Malaysia’s under-served population is paramount, the Findex survey highlighted. One example is the National Savings Bank (BSN), which is said to be a “clear innovator on agent banking, ATMs, accounts for children, special savings for low-income groups, microfinance, etc”. Malaysia should continue to take greater strides in this aspect.

The government needs to work with the private sector and improve people’s financial knowledge – it will be good for the economy and good for business. A lesson learned too late could be even more costly – for the citizen and the country.