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Some Implications of Credit Spending: A Brunei Case Study. Dr Teo Siew Yean & Mr Gabriel Yong. Definition of “Consumption”. Consumption is normally the largest Gross Domestic Product (GDP) component

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some implications of credit spending a brunei case study

Some Implications of Credit Spending: A Brunei Case Study

Dr Teo Siew Yean &

Mr Gabriel Yong

Contemporary Issues in Economic Development of Small States

definition of consumption
Definition of “Consumption”
  • Consumption is normally the largest Gross Domestic Product (GDP) component
  • There are two definitions of consumption. First, consumption may be divided according to the durability of the purchased objects, for example, durable goods (such as cars, refrigerators, televisions)
  • non-durable goods (such as groceries) and services (laundry service, restaurant expenditure)

Contemporary Issues in Economic Development of Small States

why we spend
Why we spend?
  • consumption is classified according to individual needs, and a commonly defined classification is:

C = F + CL + Ho + R + U

+ AP + P + WH + E + ET

where   = 

Contemporary Issues in Economic Development of Small States

we spend on
We spend on:
  • (a) food
  • (b) clothing and foot wear
  • (c) housing
  • (d) cars
  • (e) utility bills
  • (f) furniture, household appliances and services such as

plumbing services, changing bulbs, etc.

  • (g) communication technology and phone, internet bills
  • (h) wellness and hobbies
  • (i) education
  • (j) entertainment

Contemporary Issues in Economic Development of Small States

how far can we spend
How far can we spend:
  • Cash (monthly earnings, bonus,

dividends, gifts & charity, winnings, etc.)

  • Credit (personal loan, car loan, mortgage, credit card)

This empirical model is available upon request...

Contemporary Issues in Economic Development of Small States

credit spending
Credit Spending?
  • Credit is a growing part of our day-to-day lives, especially in urban cities
  • Most of us have loans, or other credit, which can be managed without difficulty if the person has the discipline to repay a minimal amount every month
  • Borrowing can be a useful tool to help households smooth their expenditure over time

Contemporary Issues in Economic Development of Small States

debt vs over indebtedness
Debt Vs Over-Indebtedness
  • Debt is not the same as over-indebtedness
  • Debt only becomes a problem when people cannot afford the repayments. It becomes a problem when it turns to over-indebtedness

Contemporary Issues in Economic Development of Small States

debt vs over indebtedness cont
Debt Vs Over-indebtedness, cont.

Over-indebtedness has a cost:

(a) a cost to consumer in terms of running the

risk of personal bankruptcy

  • a cost to banks/creditors in terms of outstanding loans
  • a cost to businesses in terms of profits cut
  • a cost to the Government in terms of debt collection and enforcement
  • a cost to the overall economy in terms of job cuts and economic instability

Contemporary Issues in Economic Development of Small States

credit performance in brunei
Credit performance in Brunei:
  • Reported by random phone

interviews, about 45- 50 percent of

Brunei bank customers apply for credit

facilities (personal loan, car loan,

mortgage, credit card/s) from bank

which they keep their savings account

Contemporary Issues in Economic Development of Small States

slide10

COMMON ASSERTIONS

Credit spending drives economic growth

But credit expansion leads only to short term growth

Credit-spending keeps consumers in perpetual debt

Contemporary Issues in Economic Development of Small States

comparison between brunei singapore
Comparison between Brunei & Singapore:
  • Singapore Straits Times (reported 1st January 2005):

credit card holders = 2.95 million

=> an average 1.2 S’porean owns a credit card/ 1 person owns more than a card

Total credit = 2.64 billion

=> an average of SGD895 amount owed per card holder

Contemporary Issues in Economic Development of Small States

slide13

Comparison between Brunei & Singapore, Cont:

  • Brunei Fiscal & Monetary Report, 2004
  • Credit card holders as at Sept 2004=
  • 94,211
  • => an average of 25 percent of Brunei
  • population owns credit card/s
  • Total rollover credit as at Sept 2004 =
  • 160 million
  • => an average of BND1698 credit card debt per card holder

Contemporary Issues in Economic Development of Small States

slide14

The main objective of this paper is to find

out how credit consumption affect the economy

CCS = Am – R + I (1)

where CCS = cumulative credit spending

AM = amount owed

R is the monthly repayment

I is the interest rate charged on amount owed every month

Rt+1= m.CCSt+1(2)

Contemporary Issues in Economic Development of Small States

slide15

Cont’

A future oriented consumer is more likely want to settle his credit

debt promptly so he could avoid to pay huge interest on amount owed

and also enable himself to spend more in the future. Consumers in this

category are more likely to have higher rate of repayment.

There is a direct relationship between Rand m.

On the other hand, a present oriented consumer does not mind to pay

more on interest rate charges to maintain his spending power.

In this scenario, the consumer pays a smaller m and has a high CCS.

However, he has to compromise this “high availability to spend” by

paying higher rate of interest each month.

Contemporary Issues in Economic Development of Small States

slide16

Cont’

It+1 = [ (0.24/12). (CCS - Rt+1) ] (3)

AS t+1 = Y - CCSt+1 (4)

Therefore, available spending, AS t+, depends on the level of income Y

and CCSt+1. We hypothesise that people spent on credit because they

believe they can pay off the debt with future earnings.

And as their level of CCS falls, they would tend to save more of their

income for the future.

Contemporary Issues in Economic Development of Small States

slide17

Simulation exercise: BND 1,200, credit limit= BND5,000

Contemporary Issues in Economic Development of Small States

simulation exercise bnd2 600 credit limit bnd8 000
Simulation exercise: BND2,600, credit limit = BND8,000

Contemporary Issues in Economic Development of Small States

simulation exercise bnd3 500 credit limit bnd10 000
Simulation exercise: BND3,500, credit limit = BND10,000

Contemporary Issues in Economic Development of Small States

slide20

Findings from previous figures:

  • According to random phone interviews, findings
  • showed that about 70 percent of consumers are
  • disciplined spenders, that is, they do make
  • repayments (fixed - BND40 or minimal - 5 percent)
  • on their loan every month

Contemporary Issues in Economic Development of Small States

slide21

However, there are a few implications that

have to take into consideration to prevent

the “anaconda” effect:

1.

creates a short-term expansionary effect that likely to end up with

inflationary pressure or an overheated economic growth that leads to a

collapse in profitability. As level of profits fall, employment and retail

sales would be cut, and consequently the sluggish economy will bring

about excess capacity and rising inventories. The Korean and Chinese

economy has resorted to increased consumer spending to revitalise the

economy. Unfortunately, the ”fake” wealth will not resolve the

fundamental economic imbalances. Instead, the decline in interest rate

that resulted from credit expansion might cause more economic problems

Contemporary Issues in Economic Development of Small States

slide22

2.

NOT ALL CONSUMERS (IF AT ALL) BEHAVE RATIONALLY

E.g. Some choose to consume harmful - instead of healthful - substance (eg. cigarette, oily food, artificial favours, etc.) --> conditions that need treatment (at a cost)

Inappropriate choices undermines spending capacity reinforcing indebtedness

Contemporary Issues in Economic Development of Small States

slide23

Cont’

3. ACTION AND REPERCUSSION

An irrational act, e.g. gambling and losing a large sum of money, affects other consumers - family and friends are first in line

In an urban setting, large losses send out a destructive wave undermining a larger number of consumer’s capacity to meet their own needs

Contemporary Issues in Economic Development of Small States

4 closed economy
4.Closed Economy
  • Y = C + I + G
  • Y = National Income

C = Consumption spending

I = Investment spending

G = Government spending

  • Increase national income, C

Contemporary Issues in Economic Development of Small States

slide25

Cont’

  • Open economy with international
  • Trade
  • Y = C + I + G + (X - M)
  • where X = values of export
  • M = values of import
  • If consumers borrow to spend in
  • neighbouring countries, then C
  • will not be recorded fully in our
  • GDP

Contemporary Issues in Economic Development of Small States

slide26
1. Credit spending is necessary because of changing needs associated with changing living environment, paradigms and mechanisms for transaction

2. In Brunei, credit spending is unlikely to lead to economic growth because a significant amount is spent outside the local economy (as is evident from the sluggish retail sector over the past 5 years)

Contemporary Issues in Economic Development of Small States

slide27
If credit spending is to invigorate the local economy, there is a need to divert spending outside Brunei to within Brunei

Contemporary Issues in Economic Development of Small States

slide28
Note: HSBC’s credit redemption scheme is a good start; as is the Economic Planning Unit’s “Brunei Grand Sales”, but needs to co-ordinate with travel industry, retailers, financial institutions at deeper levels of planning to make Brunei a more attractive place to spend

Contemporary Issues in Economic Development of Small States

slide29
Retailers & authorities need to look closer at the range of consumer’s needs without preconception - if local retailers are to supply consumers’ demand

Contemporary Issues in Economic Development of Small States

slide30
Efforts to improve quality of life, nurture and protect the self-esteem and dignity of individuals/groups, protect consumers from environmental threats - added to education on money matters is likely (from our analysis) to create a more conducive condition for credit-driven economic growth

Contemporary Issues in Economic Development of Small States

slide31

………. It is not only about how you

spend, it is also about where you

spend.

Contemporary Issues in Economic Development of Small States

slide32

Thank you

Endnote: The purpose of this paper is to give implications on credit consumption in small states such as Brunei to see if the current consumption pattern would sustain in the long run, but by no means it wants to motivate consumers to spend beyond their means.

Contemporary Issues in Economic Development of Small States