LEADING think-tank Malaysian Institute of Economic Research (Mier) is disappointed that the 2011 Budget did not provide measures to address high household leverage.

Executive director Dr Zakaria Abdul Rashid described it as a key disappointment in the Budget, besides the lack of measures such as those to address property speculation or tax on gaming and brewers or lower personal tax.

Economists have warned of a household bubble taking place in Malaysia if the high household debt levels are not addressed immediately.

They expect the government to announce policies to check on debt service burden.

US investment bank Citi recently remarked that aggregate household assets were 2.5 times household debt, while aggregate US household financial assets were 3.5 times their debt before the subprime crisis.

According to a Bank Negara Malaysia report, total household borrowings grew at an average annual rate of 9.5 per cent to RM561.5 billion as at end-August 2010 over the past four years. This accounted for 78.1 per cent of gross domestic product (GDP).

About 45 per cent of household borrowings were to finance the purchase of residential properties, while financing for car hire purchase accounted for 20 per cent of total debts.

Mier senior research fellow Dr Foong Kee-Kuan said the loan-to-value ratio (LTV) must be lowered to check on the growing debt level.

"With the Overnight Policy Rate at 2.75 per cent and the economy moderating in the second half of the year through 2011, servicing these loans would pose a problem as disposable income shrinks," Foong said at a Mier media briefing on the third quarter economic outlook.

He said it was expected that the central bank would lower the LTV in line with similar moves undertaken by Singapore, Hong Kong, China, Korea and Taiwan.

It has been rumoured that the LTV could be reduced for the third and subsequent house purchases after the Prime Minister's earlier announcement last month that house financing might be capped at 80 per cent from 90 per cent for third and subsequent mortgages.

Foong said while the banking sector may not favour the move as it would affect the revenue, lowering the LTV ratio and imposing tighter credit card conditions would address the household debt problem.

Meanwhile, Zakaria said Mier maintains its GDP growth forecast at 6.5 per cent for 2010 and 5.2 per cent for 2011.

Economic growth is expected to taper off in the second half due to weaker global environment and disappearing low-base effects.

"These forecasts are supported by recent in-house surveys," he said, referring to the surveys on the automotive industry, residential property, tourism market, retail trade as well as business and consumer sentiments.

The Business Conditions Index declined to 104.9 points in the third quarter, which more than offset the surge in the Consumer Sentiment Index to 115.8 points.

Other indices also painted a similar gloomy environment ahead although they remained above the 100 points-mark.

Meanwhile, Mier anticipates the OPR to remain at 2.75 per cent till year-end and trend higher to 3.25 per cent in 2011, in tandem with a higher overall CPI forecast of 2.5 per cent year-on-year.

It also forecasts the ringgit to trade at 3.200 by end-2010 before strengthening further to 3.100 in 2011.

Recent forex liberalisation measures had lifted the ringgit's sentiment and should be conducive for further development of the financial market.

However, these measures also generated more volatility to exporters and may therefore require active monitoring by the central bank, Mier added.

SOURCE: Business Times