Less spending power as loan holiday draws curtain

Retail and hospitality serving M40 will be hardest hit, where moratorium not extended and consumers more selective when it comes to spending


THE end of the loan moratorium today is likely to descend some 6.2 million borrowers into a state of reduced disposable income as they restart bank loan repayment after a six-month break.

Bank Negara Malaysia granted an automatic loan moratorium on loan repayments for small and medium enterprises and individuals in April, and announced additional targeted assistance in July for borrowers who need financial relief once the six-month moratorium expires.

Borrowers who have committed to loans such as mortgage and hire-purchase will have to honour tenured monthly repayment.

This will have ramifications for both the individuals’ personal finances and certain sectors of the economy.

“Through the past six months, many Malaysians have enjoyed extra liquidity and may have developed a false sense of security about their finances. Malaysians would have (had) 20% to 30% more cash on hand.

“We’ve seen over the months that due to the low-interest rates, many investors had excess cash which largely contributed to the inflation of trading volumes on the stock market,” StashAway country manager Wong Wai Ken told The Malaysian Reserve.

The loan moratorium, coupled with the Movement Control Order (MCO), drove many individuals into the stock market to participate in trading activities.

Online equity brokers such as StashAway and Rakuten Trade Sdn Bhd registered a surge in account openings during the government-imposed MCO period.

However, Wong cautioned that the loan holiday has given borrowers’ an artificial sense of financial security that could potentially force them to liquidate their stock market investment to resume their loan repayment.

“However, fortunately, many brokers tightened their share margin financing caps in June. With that said, forced-selling activities may not be significant enough to cause the bubble to burst.”

As a digital wealth manager, Wong said StashAway encourages investors to see through the crises and continue on with regular investing. Losing momentum or reverting to old habits of spending first and investing later won’t bring lasting benefits, he added.

Additionally, nervous investors who try to time the market typically happen to miss the five best performing days this year would have been down a disastrous 29%.

“Systematic investors who dollar-cost averages their investment on the first of every month would have made a very healthy 8.8% return. Not surprisingly, most gains would have been derived from investing in April and May.”

Leading back to the moratorium, Wong said the loan holiday is a well-crafted policy which played a key role in the government’s recovery strategy.

The ending of the moratorium is a necessary move for the government as artificial factors could affect the health of Malaysia’s financial sector if it is in place for too long.

“Banks would immediately begin to normalise their credit risk as borrowers begin repaying. Loans for residential properties and passenger cars account for over 40% of the banking system, repayments will be a relief to the financial sector.”

Wong opined that with the interest rates at record lows, it’s still unclear if businesses and individual borrowers will have an appetite for credit.

“Hence, it is imperative that banks are able to make interest income on their existing loan books if they are not able to deploy funds to expand their loan books.”

Wong said retail and hospitality sectors are awaiting the impact of the moratorium ending with bated breath.

Since the Recovery MCO, local holiday destinations have been well frequented due to promotions and pent-up demand from Malaysians limited to local travel.

“Retail has largely shifted online as well and is recovering with most Malaysians returning to the workplace. With a portion of consumers’ cashflow now returning to loan repayments, we will be able to see a cut back on discretionary spending.”

Wong added that as spending by the Top 20 income group has always been resilient and not affected by recessions, luxury items and destinations should still see activity.

“The Bottom 40’s consumption should remain stable at least for another three months due to moratorium extensions being available for those in need of support.”

Wong also noted that retail and hospitality serving the middle-income segment (M40) will be the hardest hit, where the loan moratorium will not be extended and consumers will be more selective when it comes to spending.

“Retail real estate investment trusts (REITs) would come back under pressure if consumers choose to be more prudent with their spending and tenants having difficulty in making rental payments, this would put risk on the REITs’ yield.”