Export-oriented corporates' sentiment to rebound amid trade war

  • Business
  • Thursday, 27 Jun 2019

Morgan Stanley upgraded its already-positive forecast for China

KUALA LUMPUR: The sentiment of export-oriented corporates in Malaysia is expected to rebound as the country is one of the key beneficiaries of the ongoing US-China trade war as global supply chains realign from China.

According to the latest RAM Business Confidence Index (RAM BCI) for the third and fourth quarter of 2019, the overall index for export-oriented corporates jumped 2.1 points.

This was the first uptick in the last three quarters and the biggest increase to date, it said in a statement on Thursday. 

“At 57.9, the surge in optimism is mainly attributable to a steep spike in corporates’ turnover and profitability sub- indices (+7.2 points to 61.6 and +7.5 points to 61.6, respectively).

“The above, coupled with an improved reading for the corporate manufacturing sector in particular, may have stemmed from positive trade diversion effects,” it said. 

RAM said Malaysia is one of the key beneficiaries of the ongoing US-China trade war, which has prompted the realignment of global supply chains away from China. 

Its sample of export-oriented survey respondents reported more orders, mostly from other Asian economies such as Thailand and South Korea. 

“Anticipating a recovery in their order books after the sluggish performance this year to date, the proportion of export-oriented firms that expect to operate above normal capacity (> 95% capacity utilisation rate) also swelled 25.9%, compared to 14.3% in the last survey. 

“The rise in net FDI inflow and foreign investment approvals in 1Q 2019 is also consistent with the greater need for more capacity by export-oriented firms and supporting businesses along the supply chain,” it said. 

However, RAM Ratings said despite more positive readings for export-oriented corporates, the overall RAM BCI still indicates a subdued level of optimism through the next six months.
The overall indices for both corporates and SMEs were little changed from the last survey, at a respective 53.6 (+0.1 points) and 51.8 (-0.3 points). 

“The cautiously optimistic sentiment is not surprising given the challenging operating environment, particularly amid the disruptions caused by the US-China trade tensions, Brexit complications and uncertainties amid a scenario of moderating global growth. 

“Firms mostly still believe that the next six months will remain challenging, despite signs of trade diversion benefits. 

“The heightened concern is reflected in the higher number of firms citing “weak economic conditions” as their main challenge in the next six months. This proportion has risen to record highs of 43.1% for Corporates and 44.8% for SMEs. As such, the improvement in performance-based indicators may be short-lived given the lingering economic ambiguity,” it said.

However, the RAM BCI also suggests the economic headwinds in 2H 2019 have a more pronounced impact on smaller SMEs rather than bigger corporates. 

While larger manufacturing and export-oriented firms have expressed more positive sentiment despite the tougher operating conditions, smaller SMEs do not appear to share the same bullishness. 

The turnover and profitability sentiment of export-oriented SMEs weakened a respective 0.6 and 0.7 points while that of manufacturing SMEs fell 0.7 and 0.2 points.
This could be due to their relatively small stature and less diversified supply chains as well as client bases, which render them prone to fluctuating business volumes. 

SMEs’ sensitivity to sudden changes in global conditions is also evident from the more subdued sentiment (overall index reading of 51.1) of those surveyed after the US’s additional tariffs on China, compared to those surveyed before the tariff escalation (51.9). 

“As such, it is crucial that the government enact policies and mechanisms to enhance cooperation and business relations between SMEs and corporates. This would improve the business eco- system, for more sustainable development through shared prosperity,” it said.

The RAM BCI is a comprehensive survey jointly conducted by RAM Holdings Bhd and RAM Credit Information Sdn Bhd, on business sentiment in Malaysia. 

The index is based on data from a survey of close to 3,500 SMEs and corporates across five main industry segments respectively.
The index, designed to measure forward-looking expectations, offers a timely barometer of future economic activity to guide businesses’ investment decisions and planning as well as provide inputs for strategic policy making by various stakeholders of the economy. 

This is done through the indication of positive and negative sentiment on seven key aspects that are pertinent to their business operations over the next six months. 

The seve business aspects surveyed are turnover, profitability, business expansion, hiring, capital investment, capacity utilisation and access to bank financing.
An index value of 50 is the neutral benchmark while a value above 50 indicates positive sentiment by the firm; below 50 shows negative sentiment. 

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