Our Household Debt-to-GDP ratio and inflation will definitely increase

The Phantom of the Pakatan Opera

The previous govt has been trying to reduce the household debt to GDP ratio for the past few years with higher interest rates and stricter borrowing requirements. The ratio had declined from 89.1% in 2015 to 88.5% in 2016 to 84.9% in 2017.

Over the past few years, domestic consumption had continued to enjoy robust growth and was never the problem. The problem was the relatively high household debt that put our consumers under pressure.

However, due to populist policies and a misguided believe that a 3 month “tax holiday” will boost domestic demand (which was already high), the Pakatan Harapan government has made things worse for the Malaysia economy and the people.

I now see so many people wanting to take advantage to buy new cars, new phones and the latest electronic appliances, I am afraid the following will happen:

1. Our Household Debt-to-GDP ratio will surely increase

This is a given as many consumers will now load themselves up with credit card, car loans and property loans to “take advantage” of this 3 months period. They may not need these new toys and gadgets but are too tempted to buy it. To make it worse, those with existing cars will see that the value of their old cars have also depreciated in price.

What this means in future is that consumer demand may drop substantially in future as households will be bogged down from debt.

2.  Inflation will increase

When demand increased, prices will increase. This is basic economics. These price increases may offset the savings from the 6% GST. The previous BN govt had already been trying to limit unproductive domestic consumption in order to limit inflation. So we will have to be careful here.

3. Our trade balance may turn from surplus to deficit

Much of the items that I see people preparing to buy during this period are mostly imported products. At the same time, the latest PMI readings in May is the lowest since December 2016 and more worryingly, export orders have reduced tremendously.

This means that Imports may surge while exports may go down – thus our trade balance becomes negative.

If this happens, Malaysia will experience the dreaded triple deficit of current account deficit, budget deficit and trade deficit. Let’s hope this will not happen as it means certain downgrade of our country’s credit ratings (especially since there are murmurs that a downgrade is imminent due to the removal of GST and re-introduction of fuel subsidies).

My advice to all is to take advantage of the 3 months period to BUY ONLY WHAT YOU NEED. Don’t be tempted to buy what you want or worse – buy what you cannot really afford.

Source: The Phantom of the Pakatan Opera

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