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Struggling and frustrated: Most aid goes to the B40, leaving the M40 feeling adrift and on their own.
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The economic future of the country looks scary, and if the young bankrupts and imminent retires are not atteended to soon, we could be in truly tough times.
THE economy is the most talked about topic among Malaysians, with issues including the increasing cost of living, shrinking ringgit, continuing weak economy and sadly, the endless politicking.
While attention has been cast on the Bottom 40, or the group known as B40, as they make up the lowest earners, the middle class, the Middle 40, or M40, shouldn’t be forgotten either.
Malaysians are categorised into three different income groups: Top 20% (T20), Middle 40% (M40), and Bottom 40% (B40).
To be in T20, a household’s monthly income should at least be RM13,148, while the M40 and B40 groups have raised their bars to RM6,275 and RM3,000 respectively.
We don’t need a survey to know that the people in the bottom half of M40 and B40 are barely making ends meet and struggling to maintain a decent lifestyle.
At the lowest end, 70% of these poorest are the bumiputeras, while the rest are Chinese and Indians, which proves the poor comprises all races.
The M40 – which forms 40% of Malaysia’s population – includes mostly wage earners, in both public and private sectors.
The bulk of their income goes to paying the car and housing loans, rent, and groceries. After deductions from the essential bills, such as phone, Astro, petrol, and children’s education, there’s barely anything left to save.
It’s harder for those who need to take care of their ageing parents, a noble endeavour which naturally includes settling healthcare bills, and even expenses for care takers.
And since the majority of the M40 lives in the cities, the household income of RM6,275 is almost negligible, and they can hardly be faulted for feeling that their standard of income has dipped drastically while the cost of living has increased.
The M40 essentially comprises the most frustrated lot since most aid goes to the B40, leaving the former feeling adrift and on their own.
Most of them don’t have alternative revenue streams besides their monthly wages, and they are dependent on corporate performances, so the overall economy is key.
They are unlikely to care that the Department of Statistics’ Household Income and Basic Amenities survey indicated that the mean income of households in 2016 reached RM6,958, a 6.2% annual appreciation from RM6,141 in 2014.
The survey also revealed the incidences of poverty decreased from 0.6% of the population in 2014 to 0.4% in 2016. Compared with the population of 30.7 million in 2014 and 31.7 million in 2016 (from the same portal), the numbers also decreased from 184,200 to 126,800 from 2014 to 2016.
The 11th Malaysia Plan (2016 – 2020) Mid-Term Review stated that the mean household income is predicted to reach RM8,960 by 2020.
The term “middle class” has different meaning and measurement to economists and academics from those classified in the M40 category.
As one analyst rightly pointed out, a household of four living in the Klang Valley with an income of RM4,000 per month, would be classified as urban poor due to the higher cost of living. However, that income would be comfortable to live in Pasir Mas or even Taiping.
It won’t be wrong to suggest that at RM4,000, that’s only enough for a single person to live in the Klang Valley.
We need to understand that the key people driving the country’s economy are the middle-income and top earners, many of whom feel they have fallen between the cracks of progress.
At every Budget, they seem to be the forgotten Malaysians, and each year, they hope for lower level tax bands for themselves, so they can have extra disposable income, but that never happens.
Khazanah Research Institute’s (KRI) State of Households 2018 revealed a steady increase in the income gaps between the Top 20% (T20), M40 and B40 groups since the 1970s. In 2000, the estimated real mean household income differences between T20 and M40, M40 and B40, and T20 and B40, were RM6,000, RM2,000 and RM8,000 respectively.
By 2016, however, it increased to RM9,000, RM4,000 and RM13,000.
These figures show that T20 households are gaining wealth at a faster rate than the rest.
Despite the improvement in mean household income figures, the gap between income groups continues to rise, and the survey added that “the escalating cost of living has put financial pressure on the M40 and B40 groups.”
“With income growing at a slower pace compared with the cost of living, the M40 and B40 groups are experiencing an abridged disposable income, which could be detrimental to future consumption, activity, emergency or debt services.”
Combining data from the Department of Statistics’ Household Income survey (2016 and 2014) and KRI household reports (concerning population increase), it’s clear that the percentage of households living under the 60% median grew from 2014 to 2016 by 41.8% to 43.5%, with an estimated 2.8 million households in 2014 and three million households in 2016.
The increase also suggests that more M40 households have slipped into the B40 category – and this is where the alarm bells go off.
In the 11th Malaysia Plan (2016-2020), targeted subsidies, cash handouts, healthcare benefits, education, along with employment and entrepreneurship opportunities, include the usual strategies to ease the burden of B40 households.
One of the major concerns among the young M40 family is that they can no longer afford to buy a “middle class” home, and the difficulties have been aggravated by how they need to live relatively close to their workplace.
As much as the government expects housing developers to build affordable houses, let’s not forget that most of these developers have bought land at premium prices, and as private concerns, they still need to make profits.
But homes in Malaysia have become “seriously unaffordable” by international standards, and there’s no need to point fingers at developers when the governments have basically failed to do the job, unlike Singapore’s Housing Development Board (HDB), which builds and upkeeps flats that don’t degenerate into urban slums.
Their HDB flats are so well-designed and maintained that they can pass off as high-end apartments by Malaysian standards.
Bank Negara reported that from 2007 to 2016, house prices grew by 9.8% while household income only increased by 8.3%. While developers blamed rising construction costs – including labour outlay – and stagnant salaries for the increase in house prices, all this means nothing to the M40, because ultimately, they still can’t buy houses.
The rent-to-own scheme which the B40 has enjoyed from the low cost houses, needs to be extended to the M40, so they, too, can enjoy the same benefits, and while such help is expected to come via PRIMA Corp, a federal government-linked developer which supposedly caters for M40, it’s still falling behind schedule.
While it could be easy for the M40 to request more support, including allowances for school-going children, and even free student passes for public transport, it’s time that financial literacy be introduced at school level.
A study by S&P Global Literacy Financial in 2014 showed that the financial literacy rate in Malaysia is only at 36%, compared with 59% in developed countries.
“The low financial literacy rate is among the factors that has contributed towards high levels of debt – including worrying bankruptcy problems – among the youth.
“Between 2013 and 2017, a total of 100,610 Malaysians were declared bankrupt, of which 60% were between 18 and 44 years old,” according to Finance Minister Lim Guan Eng.
Apart from the youth, Lim noted that older Malaysians are also facing serious financial challenges, particularly when it comes to their retirement.
Based on estimates by the Employees Provident Fund (EPF), he said that as of 2019, an individual requires savings of at least RM240,000 by age 55 to retire comfortably.
However, based on the EPF 2017 Report, active contributors aged 54, have average savings of only RM214,000 in their accounts.
“What is even more worrying is that two-thirds of contributors aged 54, only have RM50,000 and below in their EPF accounts in 2015,” he reportedly said, adding that this was well below the recommended amount for savings.
Lim noted tha the low amount of savings was inadequate and estimated it to run out within five years of retirement, although the average life-span of Malaysians is 75.
Basically, the B40, M40 and, our young and old Malaysians, are all either grappling with financial problems, don’t know how to handle their money, or don’t even earn enough in the first place.
This is unlike the situation for the T20, which has disposable income where their wealth encourages investment and wealth creation, the main principles of the T20 group.
But of all people, politicians should know the importance of the people wanting to have money in their pockets and feeling well heeled.
Easier loan payments, good refinancing packages and transport allowances should be considered to help the M40.
If the market continues to slide, there will be many unhappy people, and the resentment will translate to protest votes. For them, it simply means the government is doing a lousy job, and they couldn’t care less for the reasons, however valid they may be.
Wong Chun Wai began his career as a journalist in Penang, and
has served The Star for over 27 years in various capacities and roles. He is now editorial and corporate affairs adviser to the group, after having served as group managing director/chief executive officer.
On The Beat made its debut on Feb 23 1997 and Chun Wai has penned the column weekly without a break, except for the occasional press holiday when the paper was not published. In May 2011, a compilation of selected articles of On The Beat was published as a book and launched in conjunction with his 50th birthday. Chun Wai also comments on current issues in The Star.
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The stock market crash in China and around the world shows how developing countries like Malaysia are increasingly vulnerable to financial shocks, including outflows of foreign funds
THE year 2016 started with a big bang, but the kind we would rather avoid. The Chinese stock market plunged for several days, causing panic around the world, with the markets also falling in many countries, East and West.
This is another wake-up call to alert us that finance has become inter-connected, indeed much too inter-connected, globally.
Many developing countries like Malaysia have been drawn into the web of the global financial system in manifold ways, and that has made them more vulnerable to adverse developments and shocks.
We are now in an era of financial vulnerability, which easily turns into vulnerability in the real economy of GDP growth, trade and jobs.
An immediate issue is whether the rout in China’s stock market will affect its real economy, in which case there will be serious effects.
One view is that it would contribute to a “hard landing” as the Chinese economy already has many problems.
Another view, more realistic in my view, is that the spillover to the real economy will not be significant. A paper by Brookings-Tsinghua Centre shows that the inter-connection between the stock market and the economy is limited in China.
In the United States, half the population own stocks and corporations rely heavily on funds raised in the stock market, but in China less than 7% of urban Chinese invest in the stock market and corporations rely much less than American companies on the stock market to raise funds.
Nevertheless, China’s economy is expected to slow down this year. Other factors also add to a pessimistic outlook for developing countries.
These include continuing weak conditions in Europe and Japan, that may offset the US’ more steady recovery; the expected interest rate rises in the US, which will draw portfolio funds out from developing countries; and weakening of commodity prices.
Already many developing countries are suffering on the trade front. In Malaysia, exports in November 2015 grew only 6.3% from a year earlier. More worrisome, Malaysia’s industrial production, also in November, grew by only 1.8% from a year earlier.
Other Asian countries fared worse. Korea’s exports for the whole of 2015 fell 8%. Taiwan’s exports are also expected to have fallen 10% last year and Singapore’s manufacturing sector declined 6% in the most recent quarter.
China’s exports in December fell 1.4% from a year earlier but imports fell more, by 7.6%, which is bad news for other countries as China has less demand for their exports.
But of equal if not more concern is how, in the financial area, emerging economies like Malaysia have in new ways become more dependent and vulnerable in recent years.
Foreign presence in these countries’ domestic credit, bond, equity and property markets has reached unprecedented high levels, and thus new channels have emerged for the transmission of financial shocks from global boom-bust cycles, according to a South Centre paper by its chief economist Yilmaz Akyuz. (http://www.southcentre.int/research-paper-60-january-2015/)
During a boom, there is a rush by yield-seeing investors to place their global funds in emerging economies. But when perceptions or conditions change, the same funds can exit quickly, often leaving acute problems and crises in their wake.
Malaysia is among the vulnerable countries. Firstly, the fall in the prices of oil (on Jan 12 reaching below US$30 a barrel) and other commodities has affected export earnings.
The balance-of payments current account used to enjoy a huge surplus, but this has been shrinking.
In 2010–13 there were very high inflows of foreign funds into Malaysia, averaging over 10% of GDP. But by 2015 there was a sharp reversal, with foreign funds flowing out from the equity and bond markets.
Malaysia is vulnerable to large outflows as foreigners in recent years have built up a strong presence in the domestic bond and equity markets. Foreign holdings of bonds (public and private) peaked at RM257bil in July 2014. And the share of foreign holdings in the stock market was 23.5% at the end of 2014, indicating a foreign-holding value then of around RM400bil.
Many billions of ringgit of foreign-owned bond and equity funds have been leaving the country in the past couple of years, especially 2015.
Due partly to this, Malaysia’s foreign reserves have fallen from US$130 bil in September 2014 to US$95.3bil at end-December 2015.
Although the present reserves are adequate to cover imports and short-term external debt, they are also vulnerable to further outflows of foreign-owned funds in equity and bonds.
Debt held by Malaysians is also high compared to other countries, according to another paper by Akyuz. Debt by households was estimated at 86% of GDP in first quarter 2015 by Merrill Lynch. Public debt is near to 55% of GDP (compared to an average 40% for developing countries covered in a McKinsey report). And corporate debt is estimated to be about 90–96% of GDP.
The overall local debt is thus very high, probably exceeding 200% of GDP, one of the highest ratios among developing countries. Thus, the country has financial vulnerabilities at both the external and domestic fronts.
What the country faces is part of a trend among emerging economies that is likely to last for some time. Many other countries are in far worse shape than Malaysia.
In an article last week, Martin Wolf of the Financial Times highlighted the important shift in perception by investors of the prospects for emerging economies, that has resulted in capital flowing out.
Global investors withdrew US$52bil from emerging market equity and bond funds in the third quarter of 2015, the largest quarterly outflow on record. The most important reason for this is the realisation of the deteriorating performance of the emerging economies, according to Wolf.
Thus, developing countries are in for a tough time this year. Of course the vulnerabilities may not translate into actual adverse effects, if global or local conditions improve. But it is better to prepare for the probable difficulties ahead.
By Martin Khor Global Trends
Martin Khor (director@southcen tre.org) is executive director of the South Centre. The views expressed here are entirely his own.
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