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Drastic Rate Hikes Not Best Way to Deal With Inflationary Pressures, Says MARC    
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Source: Bernama

KUALA LUMPUR, Nov 25 (Bernama) -- Malaysia's high household indebtedness and drastic increases in interest rates are probably not the best way to deal with inflationary pressures, should they emerge in the economy in the near future.

Indeed, a sharp rise in interest rates could affect consumers by way of higher monthly instalents, potentially leading to higher non-performing loans, according to MARC Economic Research on "Consumer spending - solid as a rock ?".

This, however, does not imply that interest rates should not be increased at all, it said.

In fact, Malaysian Rating Corporation Bhd'S (MARC) estimate of a neutral rate for the Overnight Policy Rate (OPR) of between 3.25 per cent and 3.50 per cent suggests that rates may have to go up by 50 to 75 basis points if the economy continues to recover.

However, such an adjustment should be made in the context of policy normalisation, and not as a means to curb inflationary pressures, it said. The consumption-led growth strategy comes with a side effect -- high household indebtedness -- which as a percentage of GDP rose to nearly 80 per cent in 2009, it said.

The problem of high household debt must be addressed, and not surprisingly, Bank Negara Malaysia has taken an important step towards that goal by reducing the loan-to-value ratio to 70 per cent for purchases of three properties and above, it said.

More caps for mortgage financing (especially for high-end properties) will also help prevent a property bubble in the country, it said.

Other measures, such as higher income requirements for new credit card applicants and central credit limits for credit card users, will be helpful to prevent consumers' abuse of credit, it said.

However, it said, while all these initiatives should logically be undertaken to address the worrisome household debt conundrum, one must remember that cold-turkey measures to quickly reduce the level of consumer indebtedness can be potentially disruptive and may even result in high non-performing loans in the banking sector.

The consumption-led growth strategy comes with a side effect -- high household indebtedness -- which as a percentage of GDP rose to nearly 80 per cent in 2009, it said.

The problem of high household debt must be addressed, and not surprisingly, Bank Negara Malaysia has taken an important step towards that goal by reducing the loan-to-value ratio to 70 per cent for purchases of three properties and above, it said.

More caps for mortgage financing (especially for high-end properties) will also help prevent a property bubble in the country, it said.

Other measures, such as higher income requirements for new credit card applicants and central credit limits for credit card users, will be helpful to prevent consumers' abuse of credit, it said.

However, it said, while all these initiatives should logically be undertaken to address the worrisome household debt conundrum, one must remember that cold-turkey measures to quickly reduce the level of consumer indebtedness can be potentially disruptive and may even result in high non-performing loans in the banking sector.

MARC is of the opinion that measures such as excessive removal of subsidies and the implementation of the goods and services tax (GST) should be carefully studied, as they can affect disposable incomes and lead to a significant drop in consumer spending.

In this light, it thinks that the move to defer the GST should be viewed positively as the government is aware of its ramifications on consumers' purchasing power, especially when they already have to cope with another fuel price hike of five sen (for RON 97) on Nov 2 after July’s increase.

It said the positive thing about the high consumer spending is that it supports private consumption and the economy as a whole as evidenced by Malaysia's private consumption which contributed a hefty 3.7 percentage points out of the 5.4 per cent average growth recorded between 2000 and 2008.

In addition, Malaysian consumer’s high marginal propensity to consume will keep the economic engine humming along as there is ready demand for goods and services, it said.

MARC estimated Malaysia’s marginal propensity to consume (MPC), standing at 0.53 presently, suggests that Malaysians have a tendency to spend more than consumers in other Asian countries for every unit increase in their income.

"For instance, for every additional RM1 of income, Malaysians spend about RM0.53. This compares with 0.48 in Indonesia, 0.47 in South Korea and 0.34 in China," it said.

Another interesting finding is that Malaysians have continued to spend rigorously, even when prices of goods and services are generally high, it said.

The pace of private consumption increased significantly and surpassed the speed of the increase in the consumer price index (CPI) since early 2000, suggesting that consumer spending has been relatively inelastic in the past several years, it said.

It said the rise in Malaysia's income per capita and aggressive lending by the banking sector led to high consumer spending.

It said the income per capaita has risen to US$6,950.5 in 2009 from US$4,029.7 in 2000, and during the period, banks aggressively strove to expand their shares in the markets for mortgages, hire-purchase loans, personal financing and credit cards.

"Not surprisingly, some banks are now offering personal financing of up to RM200,000 with repayment periods ranging from 15 years to 20 years. Similarly, the number of credit cards in circulation rose rapidly by 15.4 per cent per annum, with total purchases surging from RM2.0 billion in 1992 to RM59.9 billion in 2009, a hefty 2,895 per cent jump in 17 years!," it said.

The massive amounts of loans given out to consumers who later face difficulties repaying their debts have caused a steep rise in Malaysian household debt in recent years (household debt as a percentage of GDP grew to 77 per cent in 2009 from less than 50 per cent in 2000), it said.

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