This article first appeared in The Edge Malaysia Weekly on December 23, 2019 - December 29, 2019

THE Malaysia Economic Monitor released by the World Bank recently gives a disheartening report on how Malaysians feel about their economic welfare.

The issues highlighted are not new to Malaysians, having been raised in various forums by different economists and agencies over the years. The World Bank report, however, validates the common complaints of the man in the street about the current economic situation.

Four issues are identified in the course of the World Bank’s analysis, namely consumer price inflation, inadequate income, poor financial well-being and shortage of affordable housing.

Interestingly, the report highlights a survey by Gallup World Poll (GWP), which says that while 5% more Malaysians living in urban areas reported an improvement in their living standard — from 54.1% in 2012 to 59.4% in 2018 — the number of those satisfied with their standard of living fell from 76.5% in 2012 to 69.5% in 2018.

“There are various ways to interpret these results; one plausible explanation is that even though the standard of living of urban respondents is improving by their own assessment, they are increasingly dissatisfied because it is not improving as fast as they would like it to,” says the report.

Meanwhile, respondents living in rural areas indicated an increased level of satisfaction despite a large percentage of them saying that their standard of living had declined.

The GWP survey also reveals a telling situation where the percentage of urban respondents who are considered to be thriving in their current life conditions and are likely to in the future dropped sharply from 28% to 16.2% between 2012 and 2018.

At the same time, the percentage of those who categorised themselves as struggling and suffering rose 9% and 3% respectively.

The number of Malaysians who felt they do not have enough money for food has doubled since 2012, says the GWP survey. This was more apparent in the urban areas where the number tripled to 28.7%. Those who felt they did not have enough money for shelter more than tripled in the urban areas, the survey reveals, rising to 24.8% in 2018.

Economists point out that dissatisfaction with the standard of living is a global phenomenon, and not isolated to Malaysia.

Sunway University Business School economics professor Dr Yeah Kim Leng says the feeling of not having enough income to raise one’s standard of living became more pronounced worldwide after the 2008/09 global financial crisis, largely due to the change in economic structure.

“The structural change in the economy caused the higher inequality we are seeing today — labour’s share of income has declined.

“Post-GFC, the measures taken to stimulate the economy in the form of quantitative easing and zero to negative interest rates only drove more prosperity to the rich, causing the disparity to become more pronounced,” Yeah says, adding that the government is looking at how to address economic inequality in Malaysia.

CGS-CIMB Research economist Michelle Chia, citing research done by the UN in its Sustainable Development Outlook 2019 report, says more than two-thirds of the world population are experiencing rising income and wealth inequality.

Dissatisfaction with the slow improvement in the standard of living and income inequality around the world partly explains the public discontent and political upheavals in recent years, she adds.

Given the insufficient income to improve their standard of living, it is not surprising that many turn to debt to help ease their burden. The Malaysia Economic Monitor cites a survey done by Agensi Kaunseling dan Pengurusan Kredit (AKPK) last year, which reveals that 28% of the 3,540 Malaysian working adults surveyed had to borrow from family and friends to buy essential goods.

Borrowers who earn less than RM5,000 a month shoulder heavy debt, more than 50% of which is channelled into motor vehicle purchase or financing, as opposed to borrowing to build long-term wealth, the report notes.

“The debt service ratio (DSR) remains high for borrowers with a monthly income of less than RM3,000. About 40% of lower-income borrowers have a DSR of above 40%, which leaves them with little discretionary income and saving capacity,” it adds.

The issue here is clearly the slow growth in income. ACCIM’s Socioeconomic Research Centre executive director Lee Heng Guie says the living standard of the low to middle-income households living in urban areas has been dampened by income growth that has not kept pace with the increase in expenses.

“Income stagnation relative to the rising cost of living among young and low-income earners compels some of them to get personal loans and credit cards or borrow from friends and relatives or even loan sharks to make ends meet, largely for expenditure on necessities, which include basic goods required to sustain life such as medical and education-related consumption. About 70% of their monthly income is spent on goods, housing and transport,” he observes.

However, it should be pointed out that debt in itself is not bad. “Taking out credit to raise one’s standard of living in the short term is prudent if the borrower is able to service the debt or is investing in productive assets that appreciate in value over time. Ultimately, sustainable long-term gains in the standard of living are driven by the creation of higher paying jobs and rising productivity,” says CGS-CIMB’s Chia.

Yeah agrees, saying that borrowing can help households achieve a higher level of consumption. However, they become vulnerable to financial distress if they lack the income to pay back the loans.

“It is a key risk if this becomes widespread. Those trying to make ends meet cannot save enough. The negative effect of being highly leveraged is that the borrowers become vulnerable to economic shocks or sudden income loss,” he says.

At present, Malaysia’s household debt-to-GDP ratio is 82.4%, down from 86.9% in 2015. According to Lee, the figure is one of the highest in Asia.

In Singapore and Thailand, the household debt-to-GDP ratio is 53.6% and 68.9% respectively while in Japan and Hong Kong, it is 58.2% and 73.2% respectively.

Chia says while Malaysia’s household debt is at the high end of the regional spectrum, Bank Negara Malaysia data shows that it is buffered by a healthy level of financial assets, which stand at 2.2 times household debt. This suggests that debt-servicing capacity remains sustainable at an aggregate level.

However, she adds, distribution matters. The World Bank report notes that more than 40% of lower-income borrowers incur debt to support consumption, mostly motor vehicles and personal financing, rather than investment or accumulation of assets, and spend over 40% of their income on loan repayments.

“Improving the provision of public goods (like public transport) could help alleviate constraints on household finances and redirect debt to more productive purposes,” she suggests.

Economists agree with the World Bank report that both short-term measures and long-term reforms are necessary to address the cost of living issue. Yeah says short-term measures like social spending, which is what the government has been doing, is necessary to alleviate the pressure on lower-income earners.

He adds that there needs to be more specific intervention in areas like transport, housing, healthcare and productivity. However, these issues will take time to be improved, he points out.

Lee says it is important for both the institutions and individuals to focus on macroeconomic stability, promote financial inclusion and strengthen the social safety net, the productivity-linked wage system and supply of skilled workers.

He adds that the nation also needs to look at creating high and semi-skilled employment opportunities and improving the quality of education.

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