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Putting The Brakes On Household Loans To Allow The Economy To Change Track
Malaysia Perspective | 26 March 2012

By Yang Ming Wan

Given the lackluster performance of the broader external economy, the Malaysian economy achieved 5.1 percent growth last year with the help of domestic demands. Although the economy achieved the official forecast of 5-6 percent, by taking the stance of ‘securing 5 percent, targeting 6 percent’, the Government only managed to achieve a growth rate of slightly higher than 5 percent. Things are certainly not looking good.

Since the beginning of this year, senior government officials are again pinning their hopes of sustaining its target growth rate of 5 percent for 2012 on domestic demands. This is a sign that they are already lowering their expectations, from last year’s 6 percent to 5 percent this year. It is not surprising for the Government to set a high target level of growth, because to achieve the goal of becoming a high-income country in 2020, we have to achieve an annual average growth of 6 percent. It was on this basis that the Government set its sight on ‘securing 5 percent, targeting 6 percent’ last year.

Lower Household Loans, Weaker Private Consumption

Till now, senior government officials are only expressing their hope to achieve 5 percent growth, for they have not spelt out their bottom line for 2012. Since domestic and international economies this year do not enjoy as cheerful an outlook as last year, opinions in the private sector are looking at a growth rate of below 5 percent.

January figures that tend to reflect domestic demands are painting a hair rising picture. Often seen as a yardstick for domestic demands, car sales figures have been taking a beating. It saw a 13.6 percent dip in December last year, and continued its slide in January this year with a 25.7 percent drop. In absolute numbers, this represents a sales figure of 36,864 vehicles sold in January, compared to 49,606 vehicles in the same period last year. Car production also dropped 19.3 percent to 46,274 vehicles, from 55,217 vehicles in the same period last year.
The plunge in car sales was not accidental. The measures put in place by Bank Negara to encourage responsible and prudent borrowing are starting to kick in, with household loans bearing the brunt of these measures. Approved car loan amount fell nearly 21 percent in January, while the amount applied for plunged 15.5 percent.

In addition to auto loans, other household loans are similarly affected. Most critically, the approved amount of housing loans also fell nearly 21 percent, while the amount applied for fell 6.3 percent. Credit card and personal loan approved amounts also fell sharply by 50 percent and 30 percent respectively.

Public spending started escalating last year

Bank Negara’s measures to rein in household loans have led to a 27.7 percent drop in January’s housing loan approved amount and a 20.6 percent drop in the amount applied for, so it is certain that domestic demands will be hurt. When the President of Bank Negara, Dr. Zeti, was interviewed by a commercial radio station, she expressed confidence that domestic demands will remain strong this year, and private consumption and investments will continue to grow at over 7 percent just like the past two to three years. She also thought that the Malaysian economy will still be able to grow by up to 5 percent.

Though it is not surprising for the President of Bank Negara to expect the economy to perform as such, what is puzzling is how she still believed that private consumption and investments will continue to keep up the strong growth and expected a 5 percent economic growth, after the bank’s punitive measures to rein in household loans. As a senior government official, she must be aware of how the government operates the economy and appreciate the secret of balancing the various factors.

Actually, this secret has long since been deployed in the third quarter last year, when our economy was starting to weaken. The most prominent growth during that quarter was the government’s public spending, which grew by 21.7 percent. During the last quarter last year, this figure went up to 23.6 percent, which yielded a full-year increase of 16.8 percent.

Spending on development to stimulate the economy

Bank Negara’s move to curb household loans ensures the sound development of the banking system. More importantly, senior staff at Bank Negara knows that the Government will muster all it has in the second half of the year to implement the 12th key economic area – the Greater Kuala Lumpur development project. Once this project is launched, it will fuel the growth of the construction industry, ignite a chain reaction of economic stimulations, and help to achieve the expected 5 percent economic growth.

At the same time, this economic chain reaction may push up inflation, especially in assets. If household loans were to remain high at this juncture, this development may be detrimental to the economy.

This is why Bank Negara needed to clamp down on household loans to allow the economy to change track, from one that is driven by private consumption to one driven by development.
By allowing domestic consumption to weaken now, the economy will then be able to achieve the expected growth level of 5-6 percent.

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