Keep calm, help is on the way

Retail shops affected

MY friend, who is the chief risk officer of a major international bank in Singapore texted this message in our chat group: “Dear bros, preparing for a global recession.

That’s best case scenario assuming pandemic contained by summer. Governments world over doing whatever it takes to preserve productive capacity for resumption of normal economic activities.”

Singapore has called on its reserves to spend 10% of its GDP like most European countries and now the United States to preserve productive capacity which means keeping workers employed, supporting livelihoods and stabilising businesses.

I have just texted: “Friend – not all governments preserve productive capacity. Certainly not Malaysia after the announcement of the economic stimulus programme by our PM.”

You can imagine my disappointment after listening to our PM last Friday. In my honest opinion, it felt like a stimulus programme designed by politicians rather than economists. Formulated by a back-door government trying to please its voter base and asking for acceptance.

Let us analyse the Resilience Budget by the Singapore government.

Their Job Support Scheme pays 25% of monthly wages for every local worker in employment capped at S$4,600 a month for nine months until December 2020. Enhanced Jobs Support scheme for food and beverages firms at 50% of monthly wages with the same cap of S$4,600. For aviation, hotels, travel agencies, tourist attractions, and MICE venue operators – a whopping 75% monthly wage offsets with same cap for nine whole months!

All firms qualify for the wage rebates if they do not retrench and they must pay full salaries and CPF. Employers can now forecast their annual 2020 profit and loss account based on an expected decrease in sales revenue. How much losses can our company bear? What is our projected cash flow deficit? Should we borrow more money to sustain the business? The entrepreneurs and business owners will have to decide.

Why nine months? The pandemic has now spread to over 190 countries in the world and even if Singapore is able to control Covid-19 by June, the economic recovery will be slow due to the global recession that has already set in. Singapore needs to preserve its productive capacity which includes the workforce for the gradual resumption of economic activities in global trade.

The appropriately named “Resilience Budget” is aimed at building resilience, supporting workers and protecting livelihoods. Stabilise businesses and preserving jobs. Providing welfare to its citizens. Singapore allocated S$15bil for salary subsidies and S$4.6bil for welfare payments. All direct cash payments.

In comparison, Malaysia has allocated salary subsidies of RM5.9bil and welfare payments of about RM12bil. I have no arguments against the welfare payments to the B40 group as they have insufficient savings to survive this trying period.

If Malaysia wants to prevent mass bankruptcies and mass unemployment in the SME sector, then we need to do more as the current direct cash injection falls way short. Granted our Government has no reserves to fall back on unlike Singapore, it does not mean we are not able to come up with creative solutions to solve our problems.

We know that our SME businesses will need to survive for the next six months with minimum losses. As such we must have solutions to help them reduce monthly operating cost with the view that there will be a minimum drop of 50% in sales revenue. Basic accounting rules in profit and loss (P&L) – expenses incurred like EPF, bank interests must be accounted for in the monthly accounts.

Deferred payment of EPF, interests, loans is part of cash flow computation, not P&L entries. To reduce operating cost, we would require the co-operation of the government, employers, employees and its business partners.

As the aviation industry will need complete bailout assistance from the government, I will focus on the next most affected industry which is the non-essential retail and food and beverage (F&B) shops which will suffer at least a 50% drop in revenue in the next six months.

Key observations

When revenue drops by 50% and only the wage subsidy of RM600 is provided, the losses will be too much for the business to bear. Businesses without deep pockets will close within three months and all staff will be retrenched.

Without any additional cash injection from the government, we would need to allow exemption of payment of EPF for both employer and employee for six months. The impact to the bottom line is significant. The employees will get to increase their take home pay by 11%.

Landlord to the non-essential retail outlets and F&B outlets must support with a 30% rebate on rental for six months. Better to keep a good tenant than no tenant.

The best outcome (lowest losses) is when the companies are allowed to conduct a 10 to 20% pay cut across the board. This will be offset by the additional 11% (EPF) take home pay for the employee.

There is no future for any companies that suffer a sales drop of 70%. Unless you have deep pockets to restructure and reset, it is better to cut your losses and exit.

For businesses with loss of sales below 50%, you will not benefit from the RM600 worker’s subsidy. You can use the above table to conduct your own assessment and sales forecast. I can assure you that if your sales were to decrease by 30%, you will need to conduct a cost-cutting exercise across the board for the next six months. Hopefully with the exemption to pay EPF, you might not need to conduct a deep pay cut.

Employer’s obligations

Show true leadership. Cut your own pay before your workers’.

Be transparent with your workers. Communicate clearly.

Suffer together, profit together. When sales are back to normal, reinstate to normal pay like before. If you make a decent profit by the end of the year, deposit back the exempted payments into the employees EPF

Pay your landlords on time. One good turn deserves another.

Finance Minister’s obligations

Extend wage subsidy from three months to six months. It will cost the government an additional RM5.9bil. Now you would have given a balanced resilience budget of wage subsidy of RM11.8bil against welfare payments of RM12bil.

Since the government is not able to subsidise 75% of wages, allow business owners the flexibility of salary adjustment of workers according to affected industries. It will cost the government nothing.

Exemption to pay EPF for both employer and employee for all businesses in Malaysia for six months. Corporate Malaysia thanks you. It will cost the government nothing.

Help the landlords. Exempt payment of quit rent and assessment rates for all commercial and industrial properties by state government and local councils for six months. Let the state government and local councils share the pain. It will cost the federal government nothing.

Tips for SMEs

Be numbers-driven. Test out the viability of your business with different scenarios of percentage loss in sales. If it is not viable, preserve your cash by slashing cost aggressively or exit. Live to fight another day.

Be careful. Do not borrow more from the banks to finance your losses. You will be made a bankrupt in six months’ time. Only borrow for critical cash flow requirements knowing that you will be able to pay back and that your business is sustainable in the next 12-18 months. Do not put good money to chase after bad money. Personal bankruptcy affects your family as well.

Be calm. I know many of you are worrying about the MCO and the recovery process, if any, within the next six months. Plan with the knowledge that this will be an extended period of pain and uncertainty. Plan for your business to stay alive for the next six months. It is anybody’s guess what the future holds so no point in thinking that far ahead.

Be patient. I know many of you are angry at the lack of support from the government. The support will come soon. The government’s first focus is on welfare payment to the B40’s and the needy. Our Prime Minister will want to prove that he is indeed a Prime Minister for all Malaysian or he will suffer later at the polls. Let us just continue to engage with the government in a civil manner and I am sure we will have a positive outcome soon. It is not too late for the government to give additional fiscal stimulus to the SMEs once they realise mass unemployment will occur if they don’t step in.

Stay calm. Stay at home.

The views expressed are the writer’s own.

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