We are less than a week away from the announcement of Budget 2017 and the recent raft of policy proposals disguised as “affordable housing” and “getting Malaysians on to the home ownership ladder” can only mean one thing: there will definitely be some love for property developers and banks.
Here’s an opposing view: what if in fact these “proposals” amount to little more than measures to prop up a troubled property and banking sector?
Where, after all, is the sense in allowing developers to become lenders or to allow folks to borrow for a downpayment? Or, for that matter, to allow premature withdrawals from an already shallow retirement fund to buy a home?
Self-styled contrarian economist Steve Keen says this addiction to debt will be precisely what brings our (and other similarly indebted) economy to its knees.
The basis of his theory lies in the work of one (unfortunately named) Hyman Minsky, whose theory can be summarised thus: That once consumers and corporations build up an unhealthy pile of debt, growth eventually dries up because their attention shifts towards servicing those loans instead of investing in new machinery, hiring fresh talent or starting a business.
Malaysia’s household debt, somewhere in the region of 90% of GDP currently, balloons to around 150% once corporate leverage is included — way more than the 60% to 80% so-called “safe” threshold under Keen’s measures.
When paired with the amount of credit in the system (15% of GDP in Malaysia’s case, way more than the “safe” level of 10%) according to the Australian economist, then it begins to look like the country sits on pretty dangerous ground.
The signs of a slowing economy seem to be everywhere. Second-quarter GDP was the slowest in seven years while loans growth eased to somewhere in the region of 6%, less than half the go-go days of the 14% to 15% expansion of a mere two-to-three years ago.
And (at least from an anecdotal standpoint) folks are less confident of their economic future and consequently, not borrowing as much. Why would you if business is slowing and/or you might not have a job this time next year?
Car purchases are at least a four-year jail term and hardly an asset since their value sinks like a rock once ownership passes to you. Mortgages are worse: they are at least a 15-year term but for the younger set, that could well rise to a 40-year tenure if one is buying at age 30.
While it is true that real estate is a fantastic asset class that beats inflation over the long term, rising values cannot be taken as a given. Corrections can and have happened, and as many Europeans will attest, quite a few are still suffering from the pain of a negative-equity home seven long years after the global financial crisis has elapsed.
Where, therefore, is the sense in allowing household debt to further balloon? Bank Negara Malaysia, still one of the sanest institutions in town, is in the minority in wanting to pare debt, or at the very least, its growth.
But what’s happened has already happened: Malaysians, like the Australians, South Koreans, Norwegians, Canadians and Mainland Chinese, have built up private debt to a formidable size.
The International Monetary Fund has it that globally, private debt has been increasing against GDP over the last half-century and as it currently stands, on a combined basis, private and public debt has reached a mammoth US$152 trillion or 225% of global GDP — an all-time high.
Two-thirds of that total sits in the form of private debt (roughly US$100 trillion) or roughly 150% of global GDP — a precarious situation indeed.
So, unless a miracle happens and this debt is paid off on time or early, whether here or abroad, an almighty correction is in store.
In person, Keen is hardly your atypical economist. He swears, is jovial, tells a mean joke and is unafraid of a glass of wine. In other words, he fits his own description of himself as a contrarian, which not coincidentally also describes his panacea for the global debt situation in the form of a “debt jubilee”.
That is a situation where instead of embarking on an expensive bond-buying programme where billions go to the big global banks, that money is instead deployed directly to the individual.
This allows the indebted to settle their loans, while for those with little or no debt, well then, they get to spend the cash. Which actually was the ultimate intention of all those years of quantitative easing — but which failed miserably because — surprise, surprise — those greedy bankers just nabbed that money in the form of fat salaries, even fatter bonuses and in-the-money share option schemes.
But the odds of such a debt amnesty happening here has about the same chance of a snowball surviving in hell.
It ain’t going to happen.
Why? Because in merry ’ol Malaysia, there is zero chance of the government bypassing the banks and developers because the government itself is their controlling owner. I mean, would you let your children starve? Come on…
On this argument then, a correction is in store.
Keen gives Malaysia four to five years. But if one is prudent, the preparation begins now.
Khoo Hsu Chuang is contributing editor at The Edge Malaysia
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