Abolish AP for cars — the single most effective solution to reduce living costs

The bad news is that 7.7% y-o-y inflation is still the highest in 40 years and all the cumulative price increases over the past year and a half is not going to reverse. Inflation is decelerating — and it should mathematically, given the rising base effect.

Closer to home, while inflation is not as high as that in the US, there is no doubt that prices for everything, from food to goods and services, are rising. In Singapore, inflation is running at a 14-year high, expected to average around 5.5%-6.5% in 2023. In Malaysia, headline inflation is more subdued, at 4.5% in September, thanks to huge subsidies, particularly for fuel and electricity. But for most urbanites, the “real” inflation is much higher than the official figure. We should know. This means that people will continue to struggle with high — and rising — cost of living. And high inflation has longer-term negative impact on savings, living standards and the broader economy.

Savings in secular decline as Malaysians struggle to maintain living standards

Table 1 shows the average (mandatory) savings for workers in the two largest pension funds, the Employees Provident Fund (EPF) in Malaysia and the Central Provident Fund (CPF) in Singapore. Notably, while the average amounts at the beginning of a member’s working life (up to age 25 years) is roughly similar (dollar-for-dollar), the cumulative savings for those in the older age groups, up to the 35-40 years, are much lower in Malaysia. This suggests that over the past 15-20 years, income growth — and therefore, contributions — has been significantly slower for Malaysian employees.

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The most obvious reason is the limited number of high-paying jobs being created in the economy. Previous reports by Bank Negara Malaysia show that an increasing share of jobs created has been taken up by low-skilled workers in recent periods, and many of them are foreigners. The country has lagged in terms of moving up the value chain, a well-known and well-studied fact — low-skill jobs mean low productivity gains and low pay. As we have stated many times before, the measures implemented during and after the Asian financial crisis have structurally damaged the competitiveness of the Malaysian economy.

Another reason for the lower EPF savings is due to higher withdrawals, including for the purchase of homes (where prices have outpaced income growth) and, most recently, during the Covid-19 pandemic.

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Savings = Disposable income – Monthly debt obligation – Expenditures

Not surprisingly, the overall savings rate as a percentage of income (GNI) is far higher in Singapore (50%) than in Malaysia (27%), considering the disparity in disposable incomes. Savings = Disposable income – Monthly debt obligation – Expenditures (basic necessities and discretionary). In other words, the average Singaporean earns higher income and, therefore, has much more leftover after deducting debt-servicing costs and other expenses. While savings rate for Singaporeans have been fairly stable, that for Malaysians has been falling steeply over the past 20 or so years (see Chart 1).

Hence, it is also unsurprising that Malaysians have taken on a lot more debt over these years to maintain their living standards. Household debt in Malaysia now ranks among the highest in the region, at 89% to GDP (up from 47% in 2000) while that in Singapore is more modest, at about 65%.

With monthly debt obligations — due to higher interest rates/borrowing costs — and cost of necessities rising rapidly, and very likely outpacing income growth, both savings and discretionary spending must fall. The impact will be disproportionately worse for those in the mid-lower income groups as well as households that are highly indebted. To begin with, a much larger portion of their disposable incomes go towards servicing debts and buying necessities, translating to low savings. Now, it will be worse.

Falling savings rate is a huge concern for the people and the country

The secular decline in savings rate in Malaysia is a huge concern — for the people and for the country. Domestic savings is an important pool of funds for investments — it is more reliable than foreign capital flows, which have proven historically to be a lot more fickle. A smaller pool of money available means higher borrowing costs and, accordingly, lower investments. And as we have established, investment is the key driver for economic growth and in creating more and higher-paying jobs — and savings — for the people.

For more stories about where money flows, click here for Capital Section

Rapidly depleting savings, if not arrested and reversed, will lead to many people retiring into poverty. In the words of EPF chairman Tan Sri Ahmad Badri Mohd Zahir, “The situation is that 48% of EPF members below age 55 have critically low savings.” If this is not a wake-up call, we don’t know what is.

How to boost incomes and/or reduce household debt and debt servicing?

How do we improve this rather dire situation? Clearly, we need to: 1) Raise incomes; 2) Reduce household debt and monthly debt obligations; and/or 3) Reduce living costs.

Obviously, raising income levels would be the ideal solution. But how? Employers cannot pay wages in excess of productivity gains and not be out of business. The reality is, productivity gains are being capped by our economy’s heavy reliance on primary commodity exports (oil, gas and crude palm oil) and low-value-added manufacturing sectors. This is a structural issue that requires holistic reforms, starting with improving the quality of our education system and skill set of the people, and policies to create an environment conducive to investments in the right sectors. We have written at length about what would be required, based on successes of our regional peers. As evidenced by Singapore, higher per capita income will boost the people’s savings and living standards. Hence, it is critically urgent that those reforms are carried out. But it will not be a quick fix. Easier said than done.

Reducing living costs would also be difficult as prices for commodities (food, energy, fertiliser, steel and so on) are determined globally. The Malaysian government is already spending massive amounts on subsidies, and is unlikely to be able to add more to its growing debt burden.

That leaves reducing household debts and monthly debt servicing expenses.

Mortgage is the single biggest contributor to total household debt, about 61% in Malaysia. But as we explained, this is “good debt” — because a home is an asset that will appreciate in value. Borrowing to buy a home is similar to companies borrowing to invest in productive assets that will generate future returns. Historically, ownership of — and steady rise in prices of — housing has been the key driver for global mass wealth creation-accumulation, due to its wide ownership. We have shown statistics on household wealth per adult in Malaysia — especially from non-financial assets (mainly land and housing) — expanding at a much faster clip than debts over time in our article three weeks ago (Issue 1445, Oct 31). In other words, net wealth per adult is rising because of homeownership.

In that same article, we also demonstrated how we can enhance homeownership affordability without destroying property values (and the wealth of the majority of populations) by unstapling the two functions of a home (for use as shelter and for investment) with a perpetual mortgage. Based on our mathematical simulation, the minimum qualifying household income for a mortgage can be reduced by 32%. This means a whole new segment of the population can now own a home much sooner and start building their home equity (wealth accumulation). With a perpetual mortgage, there is no need to pay down the loan principal. In other words, homeowners need only pay the monthly interest payment on the loan amount. In short, this will also reduce the monthly debt obligation for households.

Unlike a house, which is an appreciating asset, a car is an expense

Ownership of a car, on the other hand, is an entirely different matter. Hire purchase loans for cars is the second largest debt component for Malaysians, accounting for 15% of total household debt. In the US, which ranks among the highest countries in the world in terms of car ownership — at least 95% of households have access to a vehicle – car loans account for only 9% of total household debt (see Table 2).

A car is an expense, unlike a home, which is an appreciating asset. Its value drops the moment you drive it out of the dealer’s lot — and continues to fall throughout its useful life, until it is worth little more than scrap value. Ideally, the ownership of cars must be dissuaded, in favour of public transport. But we understand that our infrastructure for public transport is not yet sufficiently robust. Too many areas lack efficient connectivity and railLRT-MRT networks are not as well-planned as they could be. This should be a key area of focus for future governments.

For now though, not owning a car is not a viable option for many Malaysians. This being the case, the next best alternative is to significantly reduce car prices. Lower car prices will translate to lower hire purchase loans — and lower monthly instalments. Unlike housing, there is minimal economic damage in doing so, save for perhaps the second-hand car market. How can car prices be lowered?

Abolish Approved Permits (AP) and import-excise duties protection for local carmakers …

Abolish AP for imported vehicles and import-excise duties currently imposed to protect the local carmakers, notably Proton. Proton was the national car project but is now co-owned — and managed — by Chinese carmaker Geely. Malaysia has poured massive amounts of funding into Proton over the years but has failed to turn the company into a competitive carmaker outside of the country. The number of cars exported is small and production is largely limited by the domestic market. Truth of the matter is, Malaysia simply does not have the population size for carmakers to enjoy meaningful economies of scale.

Malaysians have paid a high price — in terms of car prices and resulting higher household debt — over the past 40 years to protect Proton’s market share and rent-seekers of the auto industry. After four decades of failed experiment, is it not time to overhaul and reform the auto industry?

Industrialisation does NOT require a national car. Case in point, Thailand now has the largest auto industry in Asean and it is among the largest in the world. It is a huge export hub for both vehicles and auto parts. The sector, spurred by government incentives, accounts for about 10% of GDP, employs over half a million workers and attracts the most auto FDI in Asean. It has grown an extensive network of supporting industries, including R&D centres established by foreign carmakers.

We can still catch up, perhaps in electric vehicles (EV) manufacturing or parts and systems needed for autonomous vehicles, which are still nascent in the region but already going mainstream in China, Europe and the US. Malaysia’s auto industry, we believe, has the talent pool, the accumulated skill set from 40 years of experience. We have good logistics infrastructure — and are finally catching up on 5G deployment. We just need more supportive government policies, like that of China and Thailand.

… and cut car prices by at least 30%

It is no secret that car prices are high in Malaysia compared to other countries. In fact, it is a lot higher as shown in Table 3. It is also no secret that imported vehicles into the country is hugely profitable to the few AP holders, judging by the huge price difference for completely built-up (CBU) cars. In other words, if cars can be imported without AP, based on free market competition instead of the current oligopolistic set-up, selling prices would be much, much lower.

We did a simplistic back-of-the-envelope calculation on how much the Proton X50 — essentially a rebadged Geely model – would cost if import-excise duties were abolished. The conclusion — the car would cost about 30% less, at just under RM80,000, than its current selling price of over RM113,000. Notably, this would be roughly similar to the car’s current selling price in China, but bearing in mind the Chinese are getting a newer model. (See Table 4).

Lower car prices translate to lower hire purchase loans. If the price for the Proton X50 is reduced by 30% (to RM80,000 instead of RM113,000), Malaysians would be paying 30% or RM446 less each month as loan repayment. This savings would go a long way towards helping alleviate the rising cost of living — and perhaps even help Malaysians rebuild their retirement nest egg.

In particular, lower car prices would disproportionately help the lower-income households, where hire purchase loans make up a materially higher percentage of their total debts (see Chart 2). These are households with minimal savings and where help is urgently needed.

And, this bears repeating because of its importance, a larger pool of domestic savings is a major source of funding for investments, the key driver for economic growth, jobs and incomes. Hypothetically, if prices for cars had been 30% lower, our total household debt to GDP now would also be lower at 84.5%, instead of the current 89%, all else being equal.

Yes, abolishing AP and import-excise duties will mean less tax revenue for the government — and less profits for current AP holders. Table 5 shows a back-of-the-envelope calculation on government revenue forgone — we estimate, totalling less than RM6 billion per annum. It may seem like a lot, but to put it into perspective, the election manifestos for Barisan Nasional, Pakatan Harapan and Perikatan Nasional all call for goodies handouts totalling over RM50 billion. Surely, surely, RM6 billion is an exceedingly cheap price to pay — for the benefit of ALL Malaysians and the country. This is especially so as we estimate savings for the people will total some RM11 billion — assuming car prices fall by 30%, on average, plus savings on interest expenses (on lower loan amounts).

The Global portfolio was up 5.2% for the week ended Nov 15, lesser than the MSCI World Net Return Index’s 6.7% gain. Bear in mind though, the portfolio has a lower risk profile, with 28% cash and 26% bond holdings. All the stocks in our portfolio gained for the week. Chinese stocks Alibaba Group Holding (+19.9%), Yihai International Holding (+19.5%) and Guangzhou Automobile Group Co (+5.8%) were the top gainers. Total portfolio returns since inception rose to 20.2%, trailing the benchmark’s 38.4% returns over the same period.

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