Article from The Star, 4 January 2015

It is not completely bleak economically this year, but Malaysians need to live within their means.

 A NEW year means new resolutions, and maybe for some, a new look and a new home.

 But for many, the New Year also ushers in new debts.

 Amid the worries about possible tough times ahead – with rising cost of living, falling Ringgit, subsidy cuts and the impending implementation of the Goods and Services Tax (GST) on April 1 – many Malaysians have gone on a buying binge, especially on big-ticket items.

 This is to avoid the anticipated higher prices due to the GST, according to the Malaysian Institute of Economic Research (MIER), and it expects many to continue their shopping frenzy until the April deadline.

 “Buying plans for cars, furniture, washing machines, TVs, refrigerators and cookers were up in the recent quarter... and consumers are prepared to go shopping for big ticket items, encouraged by the scheduled implementation of the GST,” MIER said in its 2015 economic forecast report.

 Although this expectation of a rising inflation after the tax comes into effect means that consumers will also grow cautious with their spending, there are some who worry that some of our consumers may have already over-compensated for the impending price hike and created new problems for themselves by overspending.

 A newly-married sales executive who only wants to be known as Saidah* says she has bought a lot of things to set up her new home, from furniture to electrical items.

 “And this is on top of what I spent on my wedding. I used my card a lot and with the fear of GST pushing prices, I have even bought some non-essentials like a new flat screen television,” she shares.

 Now that she has maxed her credit card limit, Saidah is getting worried.

 “I worry whether I can pay it off or if I will need to use my credit card for everyday use like petrol or groceries later.”

 Young executive Chow scrambled to get a car even though he is not fully prepared financially, just so he could beat the GST.

 “My parents helped me with my downpayment. I was scared that if I waited, I would never be able to afford a car.”

 Whether their fears are founded – GST will not be imposed on all items – many are resorting to debt first, pay later just to stay ahead of the new tax system.

 And this is the worrying issue, says the Credit Counselling and Debt Management Agency (AKPK).

 According to the Bank Negara agency’s records, up to last November, some 119,474 people have applied to join the agency’s Debt Management Programme – after finding themselves in serious debt problems, usually caused by a combination of two or more debts such as credit card, personal loan, housing loan and car loan (hire purchase).

Drowning in debt

Numbers from the Malaysia Department of Insolvency (MDI) are equally worrying.

 According to MDI, some 17,650 Malaysians were declared bankrupt from January to September last year, compared to 16,306 in the same period of the previous year.

 This means an average of 73 Malaysians were declared bankrupt each day in the first nine months of 2014, an increase from 60 a day in 2013, and there is a worry that the number will go up this year as economists predict a difficult time ahead.

 MDI statistics showed those aged below 45 make up more than half of the total number of insolvents (58% were declared bankrupt in the first six months) with unpaid car loans, housing loans and personal loans the top causes.

 Minister in the Prime Minister’s Department Nancy Shukri had earlier urged those struggling to service their debts to seek help with MDI or AKPK as they can lose a lot if they are declared bankrupt.

 With the pre-GST buying binge, the other worry is that those seduced by hire-purchase plans with high interest rates might find themselves saddled with more debt than they can manage.

 As a Khazanah Research Institute report on “The State of Households” released recently revealed, many households earning less than RM3,000 have “borrowed” at seven times their annual income to purchase items such as television, washing machines and refrigerators.

 Previous studies have suggested that Malaysians are spending a large portion of their monthly income – more than the recommended one-third – to repay loans.

 Many are resorting to creative accounting when balancing their monthly books.

 An office worker, in his forties, who has amassed more than RM50,000 debt from seven unpaid credit cards says he lost control of his spending after he used one credit card loan to pay another.

 “I was using my credit card for petrol and car repairs, but when my bill just got higher and higher, I started using other credit cards to pay off that credit card bill and before I knew it, my debt had skyrocketed,” he confides.

 Says Nor Akmar Yaakub, head of the Financial Education Department at AKPK, “Many Malaysians don’t know how to prioritise, budget and live within their means.”

 She highlights that those who attend the agency’s credit counselling programmes have on average, seven credit cards.

 “We even had one with 13 credit cards from nine lenders.”

 The problem is not the number of cards but how they manage their use and payment.

 “We had one woman with nine credit cards who said she only used them to take her family for holidays overseas. Is that a priority or emergency?” she points out, advising people to save if they want to go on holiday.

 “Now it is even more important than ever for people to differentiate their needs from their wants.”

 Stressing the importance of financial education, Nor Akmar adds, “People can make you various offers or scare you into panic buying, but if you have a strong financial knowledge, you will not be so easily swayed or tempted.

 As Nor Akmar puts it, while owning a house is an aspiration of many, you will need to make sure that you can really afford it before you make that plunge.

 “Don’t think that if you are paying a high rent now, you might as well buy a house and use that amount to service your loan every month.”

 When you own a house, she points out, you will have to pay for its upkeep and other expenses.

 “You need to look at both the financial and non-financial aspects to make sure you are prepared for both. You will need to have enough cash for the downpayment and other purchasing fees such as legal fees when you buy a house.

 “If your downpayment is low, your interest rate will be higher,” she notes, adding that it is the same when considering to buy a car.

Take charge

Licensed financial wealth planner Amelia Hong has this advice on how to cope with debts this year – live below your means.

“If you are already up to your neck in debt, there is nothing much that you can do other than reducing your expenses or increasing your income. I think it’s easier to reduce your expenses than increasing your income.

“You need to live below your means,” she says.

For those in the middle income group, says Hong, there are things that they can cut, including loan payments.

“If you currently have a big mortgage loan with the bank, you can relook your terms of agreement with the bank to negotiate a lower payment.”

Crucially, she says, one should continue saving and investing if one can afford to.

“For long-term investors, you should continue during the bad times. There are many opportunities in crises; you should continue to accumulate your assets.

“Building wealth is simple, it’s what you earn minus what you spend and the excess goes into investment,” says Hong.

Unfortunately, she says, there are those who get so scared that they stop investing.

“Some even stop saving. They don’t put their money away, and spend it instead.”

Economist Dr Yeah Kim Leng believes Malaysians will be able to weather any economic storms this year.

Although he expects household debts to increase from 87.1% in 2014 (compared to 86.8 in 2013), he thinks it will level off, as long as the loan’s growth does not exceed the country’s GDP.

“With macro prudential measures kicking in since 2012, we have seen a dampening tempering effect on loan’s growth from double digit (10-12%) in the past few years to moderate to 8-9% this year, which will help ease the concern of the debt level further spiralling,” says Dr Yeah who is also the dean of Malaysia University of Science and Technology’s business school.

He, however, thinks the number of non-performing loans (NPL) will inch up slightly, but will be within the capacity of the banks to absorb the losses.

“The banking system will have the capacity to buffer against the NPL. I don’t think it will have any impact on the asset quality of the banking sector.”

To those who worry about their loans becoming unmanageable should interest rates rise, Dr Yeah says, “They don’t need to worry, I don’t think the interest rate will be increased – at least until the second half of next year.” Dr Yeah also believes that the anticipated increase in prices of goods will be offset by lower oil prices and their effect on commodity prices.

“I don’t see the price pressure as so severe, but people should look at cheaper alternatives and cut back on non-essentials. The cost of living depends on your lifestyle.”

He nonetheless concedes that the post-GST inflation will have a negative impact on the real income of those earning less than RM3,000 monthly, which is around 40% of Malaysian households. The inflation rate which is expected to rise 0.5% will squeeze their savings or increase their debt level to the limit.

“They will also feel the pinch more, as they tend to spend proportionately more on ‘essential’ items such as food and fuel which are usually subjected to higher and more volatile price changes.

“But the higher cost of living will be manageable though, as long as the unemployment rate stays low.”

One measure that can help is for the Government to increase its social safety net, specifically BR1M.

“The government, if needs be, can still increase the allocation but the distribution needs to be more targeted. Now almost everyone is getting it.”

Names have been witheld to protect interviewees’ privacy.