[Economics] Curbing Rising Household Debt

Capping tenure

To contain the rise of household debt which reached 82.9% of GDP, BNM has capped the tenure of personal loans and property loans. The central bank announced a slew of measures aimed at reinforcing responsible lending practices and combating surging household debt. These include shortening the personal financing tenure to a maximum period of 10 years and capping the maximum tenure for residential and non-residential property financing at 35 years. 

Prohibiting pre-approved financing

In a move to curb spiralling household debt, BNM also announced a set of measures including pulling the brakes on pre-approved loans by housing developers, a feature which has allowed many Malaysians to buy properties they could not really afford on their wages. It has also banned the offering of pre-approved personal financing products which is expected to help keep a lid on the debt binge at the household level. 

The central bank has also prohibited the offering of pre-approved personal financing products, such as unsolicited pre-approved credit cards. An unsolicited credit card limit increase offer which is the offer of a specified increase in the credit limit made to a current credit card customer. Accepting the offer is usually a very simple process and in most cases does not require the consumer to provide any financial information. 

Curbing DIBS and ICS

Due to the strong house-price appreciation in recent years leading to high mortgage loan, there have been numerous calls for the government to clamp down on speculation. In November 2013, BNM issued two guidelines to banks tightening lending practices. These include curbs to Developer Interest Bearing Schemes (DIBS) and enforcement of stricter Loan-to-Value ratio calculation. Interest Capitalization Scheme (ICS) is a type of scheme where interest costs are capitalized and built into the sale price instead of being paid by the borrower as they are incurred. The most popular type of ICS in Malaysia is the DIBS where during the construction period, the developer instead of buyer pays for any interest incurred on the mortgage loan until construction is completed. To offer DIBS, developers include the cost of interest payments into their launch prices. As a result, the future cost of owning the property are inclusive of retail price and interest costs, becomes the advertised retail price, which is higher than would have been without DIBS. Since property prices are set at the extremes, this creates upward pressure on the prices of surrounding properties and higher mortgage loan. Moving into 2014, BNM will disallow banks from offering financing to any projects that offer any form of Interest Capitalization Schemes to avoid speculation and property bubble. 

Responsible Finance Guideline

Also earlier in 2012, BNM has implemented The Responsible Finance Guideline to will help borrowers to engage debt management in a more pro-active manner and negate the Non-Performing Loans. Propsective loan borrower will be assessed based on net income basis instead of gross income, after deducting statutory deductions for tax and EPF and all other debt obligations such as car loan, other housing loan and credit cards). The Net Income is effectively the take-home pay that represents the income available to the borrower to settle his debt obligations as well as the cost of living.  Also, the credit assessment will disregard one-off sources of income such as annual discretionary bonus to arrive at a more prudent credit assessment. 

Increasing RPGT

In Malaysia, real property gains tax (RPGT) is imposed with the intention to curb property speculations. Accordance with the Budget 2014 announcement, the rates for RPGT has been increased to 30% from 15% in 2013. Government’s reason for the hike is mainly to reduce speculative activities on housing prices and real estate market. Government believes that hiking up RPGT enable the citizen to purchase affordable new houses. However in long term, hike in RPGT rates will slow down the sales of the secondary markets (sub-sales) and also might reduce property investments by local and foreign property investors. 

Prudent debt service ratio

In addition to the above measures, the key credit providers especially banks are required to observe prudent debt service ratios in their credit assessment to ensure households have sufficient financial buffers to protect them against rising costs and unexpected adverse events. Households who have the financial capacity to take on borrowings will continue to enjoy access to financing. To enhance responsible debt management by households, BNM will intensify its efforts in financial education to all segments of society including young and first time borrowers from financial institutions.

To conclude, the concern over household debt has caught the attention of the authorities in taking relevant action. The level of debt continues to rise following low cost of fund and rising consumption of household. At high level of debt, Malaysia is at vulnerable to unemployment, income reduction, interest rate increase and slowing economy growth. Monetary measures and regulation will be playing important role in curbing this rising household debt. 

(Sources: Department of Statistics Malaysia, The Star, The Edge, Bernama and various research reports)

[Economic] Debate on Malaysia GST

Malaysia is set to introduce the goods and services tax (GST) at 6% from 1st April 2015, announced by Prime Minister Datuk Seri Najib Razak for 2014 Budget which will replace the current Sales and Service Tax (SST) that in total could reach up to 16%. There are ongoing debates for and against the proposed GST as it caused consternation among Malaysians with many unsure of how the consumption tax is going to affect their lives. 

For GST

Raise Government Revenue, Reduce Budget Deficit

According to CIMB Research, the proposed GST rate of 6% is estimated to raise additional federal government revenue of RM11 to RM12 billion in 2015. The broadening tax revenue base, accompanied by other fiscal reforms, including subsidy rationalisation and cost-saving initiatives, will put Malaysia’s budget deficit and debt on a firm downward trajectory. This will strengthen the country's fiscal sustainability and bodes well for Malaysia's credit rating.

Powerful fiscal tool

Secondly, the GST is widely regarded as a powerful tool to enhance fiscal revenue buoyancy as it is a broad-based consumption tax. According to The Star newspaper, more than 160 countries in the world, including seven ASEAN countries (Cambodia, Indonesia, Laos, the Philippines, Singapore, Thailand and Vietnam) have implemented GST or value-added tax (VAT), at rates of 5-27%. The idea was to replace it with the value added GST, meant to be a more comprehensive, efficient, transparent and effective taxation system for tax compliance. 

Over-reliant on Petroleum and Corporate Taxes

Moreover, Malaysia currently draws its tax revenue from petroleum and corporate taxes. However, this is cyclical and dependent on global commodity prices. On top of that, resources like petroleum are a finite resource. When the oil wells run dry, so will the revenue from tax. The GST is a more stable tax income that minimises the impact of economic events. When a recession happens, the GST still provides a stable income for the nation and therefore provide opportunities to boost the economy. 

Consumption indicator, stable tax income

GST being an indicator of local consumption is a better reflection of the economic state of a country at any point in time as local consumption is part of the Gross Domestic Product (GDP) computation of a national economy. It follows that whatever the Government makes at any point in time through GST will very much be dependent on the purchasing strength of its populace. The GST is a more stable tax income that minimises the impact of economic events. When a recession happens, the GST still provides a stable income for the nation and therefore provide opportunities to boost the economy. 

Eliminate double taxation under SST

Also, there are several inherent weaknesses in the current sales tax and services tax such as double taxation, tax embedded in goods exported and transfer pricing issues. The introduction of GST eliminates double taxation under SST. Consumers will pay fairer prices for most goods and services compared to SST as the GST captured tax at every stage from downstream to upstream, unlike the sales and service tax which brought about a compounding effect as it went down the value chain. 

Reduction in Corporate Tax

Furthermore, midsized and large firms may enjoy some cost savings if the GST is accompanied by a cut in corporate tax rate. The 2014 Budget proposed a 1% reduction in corporate income tax rate to 24% from 25% while that of SME will be reduced by 1% to 19% from 20% from year assessment 2016. However, they need to plan carefully for the GST implementation to avoid possible cashflow deficits as the supplier, manufacturer, wholesaler or retailer will have to pay GST on his business purchases despite claiming input tax. To help ease cashflows and the liquidity needs of companies, the government will set up a GST refund fund to escalate the refund process. 

Increase export competitiveness

Besides, the exports of goods and services will be zero-rated to preserve competitiveness. This will strengthen Malaysia’s export industry, helping the country progress even further. The additional export revenue will boost the country’s economic growth and the export revenue is expected to increase by 0.5% within the first year of GST implementation. Also, small and medium enterprises (SME) will not be charged GST as the threshold for the purpose of GST registration is set at annual sales of RM500,000.

Against GST

Potential hike in inflation

The biggest concern about GST is its potential cascading effects on overall consumer inflation. For Malaysia, the proposed GST rate of 6% is expected to raise consumer prices by about 2%s with food and beverages, healthcare, transportation, recreation and culture, and restaurant and hotels seeing the most significant hikes of 1-4%.

Longer list of taxable item

Another concern is that under the GST everything is taxable unless exempted, unlike under SST wherein everything is exempted unless taxable. In the GST negative list system, all goods and services not in the "Exempted and Zero-Rated" categories, are taxable. While in the older system of SST, all sales and services are not taxable except what have been listed as taxable. Thus, the citizens are to be taxed for all goods and services, which were not taxed under the existing SST. The taxable goods and services will be a lot longer list and would only be made known when the Gazette is released by the Minister. 

Fear of raise in GST rate 

Malaysia’s proposed GST rate of 6% is the lowest in the region where many countries have a 10% value added tax. There is fear that the rate of 6% GST seems low and the government has the power to increase the percentage up to 15% to increase the revenue. A raise of this rate can be found necessary in the future to gain more income. So there is a fear that in the end there will be higher taxes on more products.

Timing and readiness for GST

Also, there is concern on the readiness of the citizen to accept and take up the burden of GST. However it is noted that there will never be a good time to implement tax reforms. Based on economists’ consensus, the current economic environment of stable growth is conducive to the introduction of a relatively reasonable GST rate. A substantial dampening effect is not expected on consumer spending or a significant inflationary impact. There are concerns about the tax burden on the low income group, but even today the Sales and Service tax is not a progressive tax. 

Fairness of GST

Nonetheless, proponents of GST argue that contrary to popular belief, the rich will not be necessarily better off as the more they consume, the more they will have to pay. The poor, however, will be protected because essential goods such as sugar, flour and rice will be exempted from GST. Moreover, the impact of GST on the poor will be cushioned by various cash-aid schemes such as BR1M (1Malaysia People's Aid) introduced by the Government. 

Redistribution of revenue and government leakages

Last but not least, there are also fear that the redistribution of the revenue towards the citizen won’t happen. Some people see GST as a way to cover up the leakages and flaws of the current financial position of the government, some think that first the government should improve the procedure for the current taxes and fight corruption instead of replacing SST by a GST what in their opinion will be implemented without the credit system in a not efficient way what eventually will result in a heavier tax on all levels of the production.

In a nutshell, the GST will provide a more stable, predictable and efficient source of revenue and is a viable tax reform to enhance the government's fiscal flexibility. The key is to set a clear and credible roadmap for GST implementation to ensure its smooth execution. Adequate engagement with all stakeholders, public education and raising awareness of the tax will contribute to better management of the new tax. However, the problem of the budget deficit may not be solved by GST alone, the Government of Malaysia should show commitment to stop to all the leakage. 


(Sources: GST Official Website, PWC, The Star, The Edge, Malaysian Insider, News Strait Time, Various Research Reports, Jents Debruyne (Belgian Embassy) and various news portal)