News – Some fine-tuning needed to fix imbalances, says CIMB Investment

Not ‘fine-tuning’ but MAJOR overhaul is needed to our economy. We are still using the same Keynesian economics where consumption is good and saving is bad in such that saving deprive the economy the lubricant for more growth. This same Keynesian economics is responsible to what is happening to US and Europe now. The great Keynesian experiment is coming to its end. The problem is debt. We need to teach people to spend within their needs. Not borrowing to buy thing they not really need.


“Highly-leveraged households hold risks and constrain consumption going forward,” its chief economist Lee Heng Guie said.

The government could face a build-up of financial imbalances, if consumption is excessively credit-financed amid a prolonged low interest rate environment.

Domestic demand’s share of gross domestic product climbed from 84.1 per cent in 2009 to 87 per cent in the first quarter of the year.

Private consumption’s contribution to GDP growth also notched higher to 3.7 per cent in the first quarter of 2012.

CIMB expects domestic demand to keep the economy grow
ing over the medium term, supported by the country’s Economic Transformation Programme.

“The middle-income group accounts for 42.4 per cent of Malaysia’s 6.4 million households and plays a dominant role in rebalancing the Malaysian economy.”

The low- and middle-income groups have to cope with the rising cost of living while property prices in recent years have made home ownership less affordable.

“What worries us is their rising household indebtedness, rendering them vulnerable to income and interest-rate shocks.”
Malaysia’s household debt could edge higher to an estimated RM720.3 billion or 76.4 per cent of GDP at end-2012.

The bulk of household debt stems from the purchase of residential properties (45 per cent), followed by the purchase of cars (19 per cent) and personal effects (15 per cent).

The rapid growth of household borrowings, Lee said, is stirring worries that excessive leveraging by households may render the economy and financial sector more vulnerable to instability and crises.

He said a more calibrated policy to contain household debt may bring about a more favourable outcome.

This could be achieved by some intervention measures to offset the rapid rise in living costs, including property prices, to soften the blow on the low- and middle-income groups in the event of economic shocks.