Malaysian consumers have rarely been more optimistic. They were pleased with the change of government in May and are more confident about the future, according to the latest survey by FT Confidential Research. These developments should drive more domestic consumption, but may also inflate Malaysia’s household debt, which is already the largest in south-east Asia.

For the first time in the history of our survey, consumer assessments of the economic and political situations in Malaysia soared above the threshold between negative and positive expectations. Malaysia came top in our economic sentiment index among five Asean countries in the second quarter, and its reading in our political index far outpaced its peers. This dramatic change in how consumers view their future is great news for retailers and manufacturers.

Car manufacturers are among the obvious winners. Our survey of car-buying intentions suggests Malaysians will buy more cars in the next six months relative to the same period last year. Passenger car sales data support our findings: Malaysians bought 139,947 cars in the second quarter, up 9.2 per cent — the first positive quarterly year-on-year growth in a year. More than two-thirds of the cars were bought in May and June.

Property developers will also benefit. Our Malaysia Property Purchase Index, which anticipates property demand for the next six months, reached 50.9, an improvement from 46.7 in the first quarter and 43 in the same period last year.

Policy at play

At first glance, the cheery mood appears to be driven by government policy. Fulfilling a campaign promise, the new government removed a 6 per cent goods and services tax, and consumer price inflation fell to 0.8 per cent, its slowest pace since February 2015. 

Vehicle owners and prospective buyers are also happy with fuel prices. They are among the cheapest in the world due to subsidies, which are expected to become even more generous under the new government. 

Meanwhile, potential homeowners are pleased with the government’s plan to set up a new agency on affordable housing in response to a glut of supply at the higher end of the market.

Looking more closely, however, it is the fundamentals of Malaysia’s economy that have enabled consumers to translate the feelgood factor into higher spending. Exports of goods and services, which account for almost 70 per cent of gross domestic product, have generated trade surpluses that have continued to expand since the second quarter of last year, leading to higher employment and rising wages. 

Our survey confirmed that recent trade developments are finally trickling down to households. FTCR’s Household Income Index for Malaysia rose 5.3 points to 69.7 in the second quarter, showing that the uptick in the previous quarter was not a blip. The index had shown lacklustre performance in the previous five quarters. Rising incomes, coupled with political optimism, have fed into consumer spending, as shown by the dramatic reversal of Malaysia’s Discretionary Spending Index.

Despite plans to curb government spending, we expect Malaysia’s near-term economic growth to remain solid. Underpinned by strong export performance and domestic consumption, the country’s GDP remains on track to achieve 5.4 per cent growth this year, moderating slightly from 5.9 per cent last year, but faster than the 4.6 per cent expansion in 2016.

The only way is up

With a favourable government and a healthy economy, Malaysians are more keen to borrow. The central bank’s loan disbursement data suggest that the appetite for consumer loans has in fact been improving since last year, in line with the country’s economic recovery. We expect borrowing to increase following the election.

This growing appetite will be sustained by favourable monetary policy. With a benign inflation outlook, it is easy to understand why Malaysia’s central bank has adopted a dovish stance on interest rates. Moreover, unlike its regional peers, particularly those in Indonesia and the Philippines, Bank Negara is under no pressure to defend the ringgit, as the oil price recovery has helped maintain inflows and current-account surpluses.

One cause for concern

While a strong appetite for borrowing is an indication of a breezy economy, it also suggests that Malaysia’s household debt will expand. Since 2009, Malaysia has topped Singapore as the country with the largest household debt in south-east Asia. As of December last year, household debt was equal to 84.2 per cent of GDP and accounted for almost half of total bank loans.

Any pressure on the ability to repay consumer loans would damage the country’s financial system. Historical data suggest that non-performing consumer loans have largely been under control. However, as consumer indicators are closely tied with export performance, an escalation of the US-China trade war could mean misfortune for Malaysians next year. Approximately 40 per cent of Malaysian exports are shipped to these two economic giants.

If implemented, plans by Lim Guan Eng, Malaysia’s finance minister, to curb government spending, although positive in the long run, will hinder growth in investment and employment in the short term. The extent of the impact will depend on the severity of the spending cut, currently being debated by the government.

— Andi Haswidi, Researcher, FT Confidential Research

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors