PETALING JAYA, Aug 1 — Bank Negara Malaysia’s (BNM) move to shorten loan terms may weigh down domestic demand — a key driver of the economy — but not to the extent that is likely to hurt the country’s growth, economists have said.

On July 5, the central bank trimmed the maximum repayment period for personal and property loans, prompting concerns that this would drive down spending by consumers and affect Malaysia’s ability to sustain the economic expansion needed to become a high-income nation by 2020.

Dr Yeah Kim Leng, chief economist at RAM Holdings Bhd, agreed the decreased ability to borrow will shrink the spending power of consumers along with demand for credit.

Shorter loan terms would cut down borrowing demand, either due to a smaller loan amount being approved or a higher monthly repayment rate being imposed, he explained.

“Overall, it would have a dampening effect on consumer spending but it is desirable because you are reducing spending based on borrowing,” he said.

Yeah added that an economy driven by borrowing was “not sustainable”, pointing to the US sub-prime mortgage crisis as an example of what could happen when economic growth is fuelled by easy credit.

And despite noting the damper on local demand, he said the control measures would merely bring the already high household consumption growth rate down to a more sustainable level.

Keeping household consumption growth around the long-term average rate of seven per cent will be enough to avoid the potential fallout, Yeah said.

“Certainly, buyer consumption growth is above trend so you are moderating it to a more sustainable level,” he said, noting the year-on-year growth rate is 8 per cent.

“As long as we are able to sustain 6 to 7 per cent, the overall GDP growth would not be severely affected,” he said.

In the first quarter of 2013, domestic demand rose 8.2 per cent year-on-year compared to 7.8 per cent in the previous quarter.

“So overall, basically you are reducing the credit risk of household debtors,” Yeah said, saying that the bank’s measures would reduce borrowers’ exposure to shocks such as a sudden rise in the interest rate or cost of living, as well as unexpected retrenchment.

Dr Zakariah Abdul Rashid, executive director of the Malaysian Institute of Economic Research (MIER), noted that any degradation in consumer spending from BNM’s measures would be offset by growing affluence of Malaysians.

Zakariah said any degradation in consumer spending from Bank Negara’s measures would be offset by growing affluence of Malaysians.

“With the rising real income and low level of unemployment, we don’t have to worry very much about consumer spending,” he said, adding that Bank Negara’s move would help keep the economy stable.

“In the past, we have been banking on consumers to spend more and more money to boost domestic demand. During that time that may serve well for purposes of increasing domestic demand,” he said, noting that inflation was low in the past.

But in the face of a gradually increasing inflation rate, Zakariah said the previous practice of driving the economy by pushing locals to spend may no longer be prudent.

“Right now, the Consumer Price Index is gradually increasing... so Bank Negara has taken the right measure to curtail the spending activities of consumers, but we don’t know how exactly it will affect consumer spending,” he said.

Malaysia’s inflation rate hit a 12-month high in May this year when it climbed to 1.8 per cent.

“It will give some degree of stability to the economy. That is applying monetary policy at the right time,” Zakariah said of the central bank’s measures that are aimed at addressing the country’s rising household debt levels.

He also said consumer spending is “subdued” but still expanding, citing MIER’s Consumer Sentiment Index (CSI) for this year’s second quarter of this year which dipped slightly by 13.2 points from the first quarter’s figures to 109.7 points.

Lee Heng Guie, the chief economist of CIMB, said other factors such as stable income growth would continue to fuel consumption in the country.

“I don’t think it will dampen disposable income because the underlying purpose behind this is to ensure that the borrowers will borrow within their means, not for purpose of funding excessive consumption,” he said.

“There must be a change in lifestyle,” he said, saying there was a need to educate the public on good practices in finance management.

On July 5, Bank Negara moved to address Malaysia’s household debt, which stood at 83 per cent of the country’s GDP.

The practice of giving out pre-approved financial products was stopped, while the maximum tenure for personal loans was cut from 25 years to 10 years, and from 45 years to 35 years for property loans.

After surpassing expectations by registering a GDP growth rate of 5.6 per cent for 2012, Malaysia’s economy has expanded more slowly — 4.1 per cent — in the first quarter this year.

For Malaysia to achieve the targeted high-income and developed nation status by 2020, Putrajaya’s Economic Transformation Programme (ETP) has set a target for the country’s economy to grow at six per cent annually.