Tuesday, November 29

Are Malaysia’s young middle class earnings enough?


As the cost of living continues to rise with the recent subsidy cut as well as the coming implementation of the goods and services tax (GST), Malaysian salaries struggle to catch up.

Despite the steady and painfully small incremental rise in household income in Malaysia, economists and academics say the term ‘middle class’ does not have the same meaning it had more than 10 years ago – because being middle class no longer means as comfortable a living as before.

While disposable income or savings is a good indicator of how many people ‘live comfortably’ both Bank Negara and the Statistics Department stated in a media report that they do not keep track of such data.

The Economist announced in 2009 that over half the world’s population now belonged to the middle class characterised as having a sensible amount of discretionary income with a third left over after paying off necessities.

Discretionary income allows people to buy consumer goods, improve their health care, and provide for their children’s education.

Most of the emerging middle class consists of people who are middle class by the standards of the developing world but not developed one. Their income does not match developed world status, however, the percentage of discretionary income does.

In Malaysia, according to the Statistics Department, the median income of 40 per cent of Malaysian households is RM4,372 a month. This can be considered the middle-income group or Malaysia’s middle class. But it has also come to the point whereby the middle class has felt the pressures of growing cost of living as prices of essential items like property, food and fuel have increased over the past few years.

Maybank Investment Bank chief economist Suhaimi Illias stated in a media report that, “A household income of RM3,000 was enough to keep a family’s head above water 10 years ago. This figure has more than doubled since as he now estimates that a family of four living in Kuala Lumpur would need a ‘survivable’ household income of RM7,000 to RM10,000 after taking into account the cost of owning two vehicles, a home mortgage, child care expenses, day-to-day expenses and monthly savings.”

In light of this revelation, are the young upcoming Malaysian households still earning enough money to ‘survive’?

Taking a closer look into the middle class and its ability to survive based on current wages in today’s Malaysia, BizHive Weekly takes into account three major factors that impacts Malaysians on a day-to-day basis, including fuel, property prices, food items and real wages.

Bigger inflation ahead

Looking at fuel, the RON95 has seen substantial incremental rises over the years. In October, the price of RON95 was raised by RM0.20 from RM2.10 to RM2.30 per litre, and after a year it was raised from RM1.90 to RM2.20 per litre in September 2013.

The Domestic Trade, Cooperatives and Consumerism Ministry said the reduction of fuel subsidy was necessary for the government to keep to its subsidy rationalisation plan albeit the crashing of global oil prices.

But this means that Malaysians are now paying an average of 60 per cent more for fuel compared to 10 years ago.

Urban dwellers especially in the Borneo states of Sabah and Sarawak have it worse as not only are the highways growing increasingly congested but they also lack the more advanced public transportation infrastructure such as the Mass Rapid Transit (MRT) project available in the Peninsular.

People are also living further away from the city centre due to lower property prices and this means they have to clock in more mileage on the road.

The government thus far proposed a short term solution by letting high-income earners with monthly income of RM10,000 pay for the market price for RON95 at RM2.58 per litre once the petrol subsidy rationalisation mechanism comes into force in June.

Meanwhile, those earning between RM5,000 and RM10,000 per month will get a partial subsidy, and those earning below RM5,000 will receive full subsidy.

The increment of fuel prices despite dwindling oil prices worldwide has no doubt helped the government in terms of balancing its books, however, for the average folk, this means little, as most struggle to engage in their day to day activities.

 The homeless middle class

Malaysian Institute of Estate Agents (MIEA) president Siva Shanker was quoted in a media report saying that the inability to own houses has become critical due to the sharp upsurge in property prices.

Shanker highlighted the fact that salaries have not kept up with the upswing in property prices and this has further worsened the ability for many to purchase property.

A finding by US-based urban development researcher Demographia reveals Malaysia’s residential housing market is ‘severely unaffordable’, even more out of reach than residents in Singapore, Japan and the US.

Demographia’s finding, cited by a separate media report noted that Malaysia’s housing prices are unaffordable if the median of house price to annual income is 5.1 times.

Malaysia clocked in at 5.5 times, showing many Malaysians continue to be locked out of the housing market, compared with Singapore’s 5.1 times, while the US’ and Japan’s housing markets were found to be ‘moderately unaffordable’.

Coupled with the soaring property prices and dwindling purchasing power, it is no wonder that youths these days are dubbed the ‘homeless generation’ – middle-class young working adults who are unable to afford their first home.

Recent adjustments in overnight policy rates (OPR), interest rates and maximum loan tenures also mean that the homebuyer now has to pay a heftier monthly home installment as well.

A RM550,000 property, with 4.45 per cent interest over a maximum 35-year loan tenure means, one has to fork out at least RM2,539 every month.

A decade ago, a similarly priced property will only cost RM2,104 a month, with 3.54 per cent interest over a maximum 40-year tenure.

To add oil to the flame , property prices are expected to go up even more once GST is implemented next year. Although housing is exempted from the six per cent, GST will still be imposed on other aspects of putting up a building such as land, raw material and labour cost.

The hike in material prices will no doubt manifest into higher property prices.

Food for thought

The Domestic Trade, Cooperatives and Consumerism Ministry stated before that the government decided to reduce the current fuel subsidy by RM0.20 in keeping with its subsidy rationalisation plan with the new price for RON95 at RM2.30 per litre.

This has an immediate effect on food prices as transportation cost for suppliers have increased.

Just by looking at coffee shops, the prices of Milo and Nescafe have already increased by seven per cent in May this year due to the increase in price of fuel from September with suppliers for bread and coffee already raising their prices.

The burden on local businesses and consumers is glaring with the consumer price index (CPI), excluding rent to be at 47.78 pushing the notion that the oil price hike brought in additional inflationary pressures on the economy although the increase is within ‘reasonable’ limit by the government.

But for the rakyat, ‘reasonable’ may not be the term they would use as a visit to the local wet market shows prices of vegetables and fruits soaring as much as a third over the last few years.

Couple this with the rising cost of living and stagnant wages it is far from what the statistics imply with the rosier GDP figures.

Meagre wages for young intelligentsia

 Despite years of growth as shown by positive GDP figures, most Malaysians have yet to feel “better off” despite the indication of those figures.

Real wages is yet to keep up with the rising cost of living and inflationary pressures of subsidy rationalisations. With wages only making up 28 per cent of the total GDP as compared to the 67 per cent from business profits, many Malaysians feel that the positive GDP growth seem to signal positive business activities but yet failed to pass the benefits to the workers.

Lim Teck Ghee, Centre for Policy Initiatives CEO, said in a media report that rising incomes and relatively low cost of living enabled the middle class to grow in the past but this is no longer the general rule with urban housing especially out of reach for many earning lower incomes.

“Due to the high cost of living, being middle class today doesn’t mean anything,” he stated.

August Buma, director for the Department of Labour for Sarawak has hinted that this may have contributed to the brain drain in Malaysia causing a chasm between demand and supply.

“One thing we must also understand, as our workforce evolves, employers must also pay fair compensation for skilled workers to stop the brain drain. There were two cases whereby welders were working at Amsterdam earning RM14,000 per month,” Buma highlighted.

With such high numbers of Malaysians working overseas at an estimated diaspora of 1.2 million according to Anthony Raja Devadoss of KellyOCG, it would pose a challenge for Malaysians to attract the skilled labor force needed when free movement between ASEAN countries are implemented in 2015.

With a majority of households earning less than RM3,000 – which makes up 80 per cent of Malaysian households  and mid tier management earning 10 to 30 per cent lower than our neighbors Singapore, Hong Kong and Australia, inevitably there will be a gravitation to greener pastures.

Former managing director of Kelly Services, Melissa Norman noted that fresh graduates in Singapore are commanding a starting salary of about S$2,500 (RM6,200), while many Malaysian graduates are still getting between RM1,800 and RM2,000.

On this issue, many have brought up the argument of productivity but in the recent Sarawak Business Summit, Malaysian Institute of Economic Research (MIER) executive director Dr Zakariah Abdul Rashid noted that Sarawak showed higher productivity as compared to the Peninsular but yet wages were lower.

“The median wage in Sarawak is RM1,000 but it is RM1,400 in Peninsular Malaysia,” he said.

He also added that the GDP per capita in Sarawak was higher than the country’s average with Sarawak being able to produce high-value added products but yet unable to provide higher household income.

Albeit the argument of productivity, the rising cost of living is not biased to this and will still negatively impact the whole of Malaysia’s middle-class, not just Sarawak.

Norman was also quoted saying that organisations are definitely “feeling the pinch of scarcity of skilled talent”. This sentiment is backed by Dr Hazland Abang Hipni, state assemblyman for Demak Laut and board member of the Tabung Ekonomi Gagasan Anak Sarawak (TEGAS).

He noted in his speech during the recent Sarawak Business Summit “the lack of population to support long term demand, shortage of technical manpower, insufficient knowledge on industries, and low recruitment into technical training schools, is still quite a challenge.”

The Khazanah Research Institute Sdn Bhd’s report titled ‘The state of Households’ released recently, noted that low earnings and wealth disparity are pushing households to use personal loans or credit to purchase consumer goods.

Income and wealth disparity was also obvious in figures from the Employees Provident Fund (EPF), which showed low savings for the bottom 44 per cent, or nearly three million members noted the report.

While some 5,000 of the richest EPF members have about RM1.5 million on average in EPF savings, 13.5 per cent of EPF members have an average of only RM3,580.

This spells disaster for the younger generations.

There are some who feel that businesses should re-think the payment of large wages to CEOs and management as is happening in some developed countries – and as a rule of thumb, it should be no more than five times the wages of the lowest paid worker or those getting minimum wage.

But to all intents and purposes, this is not likely to happen as the wheeling and dealing world of big business is deeply entrenched in the ‘grab-all’ mentality.

The country has apparently reached a certain level of technological sophistication. So the increasing push for better worker remuneration is understandable. Failure to respond in the appropriate manner could result in the flight of semi-skilled and skilled workers.

Sharon, a young working adult has expressed her concerns to BizHive Weekly about the current state of the Malaysian wage system noting that, “If you compare us to places like Hong Kong or Singapore, they too are homeless but their disposable income is there to help facilitate the economy. Over here in Malaysia, we barely have enough after we pay off our loans and bills to even think about spending on anything else.”

More can be done

Thus far efforts have been taken to try to right the imbalance with the tax free threshold being raised to RM4,000. The 1Malaysia People’s Assistance Scheme (BR1M) has also been increased over the years.

In terms of housing, the government has introduced the 1Malaysia People’s Housing Scheme (PR1MA) with a rent-to-buy scheme for those who are unable to obtain financing facilities to purchase homes.

The government has also exempted basic necessities from the upcoming GST while the youth housing scheme should assist young couples earning less than RM10,000 a month to purchase their first property while also giving a discount on stamp duties as well as loan instruments.

An additional measure however needs to be taken whereby wages must be raised to keep up with the rising cost of living. There should be a partnership between both private and public sectors to not only boost the income for the nation but also cut back on the glaring disparity between the upper and lower classes.

Conglomerates that have been posting high earnings with the national GDP are also posting positive results, but yet the working class is yet to see this translate into some gains for them.

The onus to transform Malaysia into an ASEAN tiger again should not fall solely on the government but on a joint to make Malaysia’s middle class be financially robust and be able to contribute even more for the economy.