Mention cost of living and we bet everybody has something to say about it, most likely to complain that the price of almost everything is rising at a dizzying speed. The government of Prime Minister Datuk Seri Anwar Ibrahim has made tackling the rising cost of living its immediate priority. Too often though, discussions on lowering living costs, inevitably, centre on helping the lower-income households, the B40. We are not disputing that the poor require help. But as we wrote last week, these households are already receiving substantial cash transfers and aid benefits from various assistance programmes, public and private. Many of their necessities or staples are currently being subsidised or under price control. They likely do not pay any taxes. Additionally, a good percentage of them live in states where the cost of living is lower, compared with that in major urban cities and towns (see Chart 1).
We would argue that the urban middle-income households (M40) are struggling too (maybe even more so) — many are being forced to take up more and more debt just to maintain their lifestyles — and are too often neglected. Is it not time that these middle-income households receive more attention — and a helping hand? After all, this new government is championing inclusiveness. The middle-income class plays a very important role in the future economic growth potential of the country and in advancing democratic idealism. More on this later.
And as a matter of pragmatism, they do make up the majority of this current government’s voter base in the last general election, GE15. They cannot be faulted if they hold out hope! The legitimacy and continued support for any government is the promise to make lives better, especially for those who voted for them. Case in point, the mantra for Bill Clinton’s successful election presidential campaign was “It’s the economy stupid”.
Ask any self-professed middle-income person and he will tell you, without hesitation, that his income increments simply cannot keep pace with the cost inflation. And this is not a new phenomenon either. Yes, we have no doubt that their quality of life has improved. But for decades, middle-income households have watched the amounts they could save — after paying off monthly expenses — dwindle as the cost of maintaining their lifestyle rises. Do the statistics bear this out?
Who are the M40 in Malaysia? The median wage in the country is RM2,442 — assuming that wages are back to pre-pandemic levels of 2019 — up from RM1,500 in 2010. By this definition, the M40 (those earning slightly below and above this threshold) would broadly consist of clerical support workers, technicians and associate professionals, and professionals. According to the Department of Statistics Malaysia (DOSM), the median wages of these categories have grown by 54%, 49% and 58% respectively since 2010. Meanwhile, the official inflation rate over the same period was 27% (see Tables 1 and 2). In other words, wages grew faster than the cost of living — the people should be better off.
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What’s wrong with this picture? Let’s be honest, we can all acknowledge that the basket of goods in the official Consumer Price Index (CPI) calculation does not represent that of the average Malaysian. Certainly not the M40. For instance, the inflation rates for subgroups of expenditures such as food away from home (54%), outpatient services (52%), repair and maintenance of personal transport (77%), passenger transport by rail (48%) and expenditure in restaurants and cafés (50%) are all notably much higher than the headline CPI figure. Is it unreasonable that middle-income households aspire to some of the finer things in life and continuously raise their standard of living?
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The largest expenditure items for the M40, we think, would be housing, education and healthcare, the costs of which have soared, year after year. Housing is an important and the most common big-ticket expense item — and the cost of homeownership has risen substantially. The median house price (according to the National Property Information Centre) has doubled since 2010. Meanwhile, using statistics from Life Insurance Association of Malaysia (LIAM), we estimate that private healthcare costs (surgical and non-surgical) too have more than doubled over the same period.
We compiled a sample of consumer goods-services that we think is more realistic for the M40 than the official CPI basket (see Table 3). Clearly, even the cost of many small-ticket items has increased by far more than the official CPI increase of 27%, especially for imported goods, which is compounded by the ringgit’s depreciation. As we noted in last week’s article, the ringgit has fallen by 30% against the US dollar, from its peak in 2013. Case in point, the price of the latest iPad sold in the US is US$799, up 60% from US$499 in 2010 — but for Malaysians, the price has risen from RM1,549 to RM3,899, or 152%, over the same period. Back in 2010, the iPhone was much more affordable at RM2,290 — today, the iPhone 14 Pro (128GB) costs RM5,299.
We did a quick and dirty simulation for the income and expenditures of an average M40 household with two working adults (see Table 4). We (conservatively) assume an average 50% increase in all household expenses, excluding mortgage, which we estimate to have doubled, due to rising house prices. After meeting monthly mortgage payments and expenses, leftover savings for this average M40 household in 2022 has almost halved — to just over 10% — in little more than a decade. (This is in line with the decline in the country’s gross savings as a percentage of GNI, from 35% in 2010 to 27% in 2022, according to the World Bank.)
The financial situation worsens significantly for M40 households with children. Most middle-income families, we believe, will struggle to provide a respectable degree of quality education for their children. We estimate it now costs more than RM200,000 for three years of local tertiary education (tuition plus living expenses) and a whopping RM800,000 to send one child overseas. That is a huge sum of money to bear for an average middle-income family. For most, private education is simply out of reach.
This is why it is imperative for the government to reverse the decline in the quality of our public education system, from primary to tertiary levels. Our country’s best university, Universiti Malaya, is ranked 351- 400 among 1,001 universities globally by the Times Higher Education (THE). By comparison, the National University of Singapore (NUS) is ranked 19th. Until 1960 (when the government decided to divide it), they were the same university.
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Education is a major issue that needs far more attention than successive governments have given it, thus far. We hope to write more on this in the future. It is a huge and important subject that deserves more space than this article allows.
The middle-income class plays a critical role in the economy. The M40 is the driving force of economic growth. They are the consummate consumers with the purchasing power for discretionary spending, which will create the stable demand needed to generate investments (the rich has a higher propensity to save and therefore consumes less relative to their income) — plus what’s left over for savings and investments.
Their savings pool is crucial to the banking system, which goes to fund domestic investments. It is also key to fostering entrepreneurship and innovation. Global studies have shown that the majority of entrepreneurs come from middle-class backgrounds. Small and medium enterprises (SMEs) are, collectively, the single biggest employer in this country.
The M40 tend to have higher education, making up the lion’s share of the talent pool required to attract investments, particularly high-value investments. They also pay taxes.
In short, the worsening financial position of the M40 will hamper the country’s future economic growth potential. How can the government help? Frankly, we do not believe the M40 want government handouts. Far from it. What they want, we think, is more holistic — improve homeownership affordability, create good, high-paying jobs, improve the quality of public education, address the falling value of the ringgit that is eroding their purchasing power and cultivate an environment that is conducive for investments. Make it easier for SMEs to conduct their business. Remove unnecessary licences and approvals, or use clearly defined online approval parameters. Eradicate corruption and “bullying” by officials and, while we are at it, eliminate the rent-seekers. And yes, leave the petrol subsidies, as they are about the only significant financial assistance the M40 enjoys — as we discussed last week, removing this does little to the federal budget and will certainly be inflationary to the economy — further pushing up the cost of living. It’s time to walk the talk.
The Global Portfolio fell 0.4% for the week ended Feb 1. The top gainers include Global X China Electric Vehicle and Battery ETF (+4.6%), Oversea-Chinese Banking Corp (+1.2%), and Grab Holdings (+1.1%) while the notable losers were Alibaba Group Holding (-5.6%), GoTo Gojek Tokopedia (-3.8%), and Tencent Holdings (-1.9%). Total portfolio returns since inception were pared to 33.2%, trailing the MSCI World Net Return Index’s gain of 45.6% over the same period.
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