Ballooning household debt in Southeast Asia: The deindustrialization trap in Malaysia

The Alarming Numbers

The scope of the problem is stark. By the end of 2021, Malaysia’s household debt-to-GDP ratio stood at 89%, the second-highest in Southeast Asia—surpassed only by Thailand (89.3%) and far exceeding Singapore (69.7%), Indonesia (17.2%), and the Philippines (9.9%). This means Malaysians shoulder nearly RM1.4 trillion in household debt, with the highest portion in mortgage and car loans (58% and 13%, respectively), followed by personal loans (14%) and credit cards (3%).

Why are Malaysian households so leveraged? Structural change, rising living costs, and the ease of consumer credit all play a role. Responsible lending has helped contain system-wide risk, but a large group of over-indebted households—particularly those with high Debt Service Ratios (DSRs)—remains deeply vulnerable. Under stress scenarios, high-DSR borrowers (DSR > 60%) are 5.5 times more likely to default and face financial hardship than those with more prudent debt loads.

1. The Deindustrialization Challenge

Malaysia, alongside its neighbours, was once a manufacturing powerhouse, providing stable jobs and income growth for its rising middle class. However, since the 2000s, manufacturing’s share of output has steadily declined (from over 30% to below 24% as of 2023). The expansion of the service sector has yet to compensate in terms of job quality or security. As highlighted by the World Bank and others, the shift away from industry has produced only limited increases in high-productivity service sector employment, with many workers landing in unstable, low-wage, or informal jobs.

2. Overconsumption and Easy Credit

This loss of stable, well-paying industrial work has coincided with aggressive consumer lending and a rapid normalization of debt-driven consumption. Social status and aspirations are increasingly tied to visible consumption—cars, electronics, travel—even as income gains have slowed. As a result, Malaysians have resorted to credit: the ratio of household debt to GDP has remained stubbornly high, and many families borrow simply to make ends meet, not just to invest in property or education.

High household debt poses a profound danger to both individual livelihoods and the broader national economy. When families become overleveraged, a significant portion of their income is redirected to servicing debt, leaving little room for savings, consumption, or investment in education, healthcare, and long-term security. This weakens domestic demand, especially in emerging economies like those in ASEAN, where consumption is increasingly vital to growth.

Over time, households may become vulnerable to interest rate hikes or sudden job losses, which can trigger a cascade of defaults.

This, in turn, affects banks’ balance sheets and credit availability—creating a vicious cycle of financial distress and economic contraction. High levels of debt also lead to greater social stress, contributing to mental health challenges, rising family disputes, and increased vulnerability to scams, as desperate individuals may seek quick fixes to financial burdens.

In the digital age, cybercriminals exploit this desperation, drawing victims into fraudulent investment schemes or illegal lending traps. Furthermore, high household indebtedness limits the government’s ability to stimulate the economy during downturns. When too many citizens are financially fragile, even cash handouts or tax rebates are used to repay debts rather than revive economic activity. Left unchecked, household debt becomes not just a private burden but a public risk.

If Malaysia’s household debt remains unchecked, what risks emerge?

• Financial Instability: A high overall debt load amplifies the risk of loan defaults during downturns or rate hikes. Stress-test results show high-DSR households are especially exposed during economic shocks.

• Stagnating Upward Mobility: Heavily indebted families have less ability to save for education, healthcare, or retirement, threatening intergenerational mobility.

• Growing Inequality: Debt-servicing requirements hit the less affluent hardest, as wealthier Malaysians benefit from lower interest rates and greater collateral.

• Weaker Economic Recovery: With nearly RM1.63 trillion in total household debt in 2024, a large share of income flows to debt repayment, squeezing future consumption and potentially slowing national recovery from economic shocks.

• Potential for Social Unrest: Persistent financial distress among large swathes of the population can accelerate social and political dissatisfaction.

1. Restore High-Quality Job Growth

o Stimulate advanced manufacturing, green technology, and high-value services to generate better-paying, more stable jobs.

o Encourage policies supporting productivity and innovation rather than mere consumption.

2. Promote Responsible Credit Practices

o Maintain and update lending standards; monitor DSRs rigorously, especially among new borrowers.

o Improve public awareness of the risks of excessive debt.

3. Strengthen Social Safety Nets and Financial Literacy

o Expand targeted welfare and emergency savings supports, especially for high-DSR and low-income households.

o Continue nationwide financial education to help citizens plan better and understand the long-term costs of debt.

4. Data-Driven Policymaking

o Use micro-level borrower and sectoral data to tailor macroprudential measures, avoiding “one size fits all” restrictions that can hurt lower-risk borrowers.

Southeast Asia’s, and especially Malaysia’s, household debt predicament is not the result of individual irresponsibility alone. It is deeply tied to deindustrialization, job precarity, and the easy availability of credit—amplified by evolving consumption norms. While prudent lending has insulated the overall financial system thus far, the proliferation of high-DSR borrowers is a warning sign. Bold, targeted action—from rebuilding the foundations of stable employment to stricter but nuanced credit oversight—is crucial to ensure Malaysia’s development remains both inclusive and sustainable, rather than an illusion built on borrowed time.