Reviving SMEs key to post pandemic recovery

Economist Mnokarn Mottain says: In a nutshell, saving SMEs during this pandemic crisis is a top priority. The sector plays a vital role in driving the overall economy in the short and long term. If Malaysian SMEs fail to rebound, Malaysia’s economic growth may deteriorate even further. Unemployment rate could easily soar to double digits, which we have only seen during previous economic crises.

THE economy is experiencing a setback due to the Covid-19 pandemic as a result of an abrupt disruption in consumer spending and global supply chain.

There is no doubt that small and medium enterprises (SMEs) have been hit largely due to cash flow issues and lack of financial strength.

While the rollout of several stimulus packages by the government has been timely, many SMEs are still struggling since the movement control order (MCO) which took effect in mid-March.

Going forward, the future of Malaysia’s SMEs will be challenging due to uncertainty of a Covid-19 vaccine and prolonged containment measures both domestically and globally.

Representing the vast majority (98.5%) of the business population with a contribution of 38.3% to overall gross domestic product (GDP), 17.3% to total exports and 66.2% to overall employment as of 2018, SMEs are one of the major catalysts to our economic growth.

SMEs in Malaysia have historically demonstrated strong resilience; recording growth of 6.2% year-on-year (y-o-y) in 2018 (2017: +7.1% y-o-y), outpacing the overall GDP (+4.7% y-o-y) and non-SMEs GDP (+3.8% y-o-y) growth.

The stronger growth of SMEs in 2018 show that they were able to withstand external shocks such as the then unresolved trade spat between the US and China as well as slower global growth.

This is due to the fact that majority of the SMEs are domestically driven and have proven to be more resilient than the larger firms.

The majority of SMEs are micro enterprises (77%) and the bulk of these businesses are concentrated in the services sector (89%).

The services sector was the largest contributor to the GDP in 2018, with a share of 62.4%, followed by manufacturing sector with 20.1%. SMEs in the value-added segment of the services sector registered a stronger growth of 8.1% y-o-y during the year (2017: +7.2% y-o-y), the highest since 2014.

This was primarily driven by the wholesale and retail trade, food and beverages, as well as accommodation sub-sectors which formed the biggest components of the value-added segment in the services sector (63.9% of total share).

On the other hand, growth in the manufacturing sector was mainly led by the manufacturing of non-metallic mineral products, basic metal and fabricated metal products, petroleum products as well as food, beverages & tobacco products.

Undoubtedly, SMEs also play an important role in job creation. In 2018, it contributed to 66.2% of total employment in Malaysia, slightly higher than 66% in 2017. The growth of SME employment sustained at 3.2% during the year.

The majority of employment within the segment was generated by the services sector (62.3%), followed by manufacturing (16.4%), agriculture (10.7%), construction (10.3%) and mining & quarrying (0.3%).

Among the major factors for increasing employment by SMEs are the conducive ecosystem, policies encouraging self-employment as well as the creation of many micro enterprises and entrepreneurs.

It is evident that SMEs play an important role in the economy, contributing to sustainable growth and significant employment generation.

Unfortunately, a simultaneous deterioration in both domestic and external demand since early this year has invariably resulted in a jolt to SMEs and economic activities. The crisis has affected all levels of SME businesses including supply chains, trade and job sustainability.

Regaining consumer confidence and pivoting business activities remain the biggest challenges for SMEs. Even as restrictions are eased to allow certain economic sectors to operate, SMEs still face financial constraints and inconsistent demand triggered by the business disruptions during the MCO period.

In the event of prolonged business closures, more than half of the existing SMEs might have to downsize, restructure or close down their businesses permanently mainly due to insufficient cash flow.

They may struggle to pay employee salaries and other fixed costs such as premise rental.

A recent online survey conducted by shows that 60.3% of SMEs polled reported financial difficulties while operating under the conditional MCO (CMCO) while 48.3% experienced customer delays or cancellations of orders which reduced their potential business revenues.

On the other hand, it is also important to note that almost half of the SMEs remained closed during the CMCO period. Small businesses are sceptical of current market demand in view of significant drop in consumer spending.

These businesses might incur higher costs and debt when they resume operations due to weak demand. In turn, this could lead to higher uncertainty over job security and income.

During these unprecedented times, the government has launched several stimulus measures specifically designed to ease the SMEs’ financial burden.

According to the Finance Ministry (MoF), 18,227 SMEs have benefited from the SME soft loan funds allocated by Bank Negara. This represents 2% of the total 907,065 SME establishments in Malaysia.

As of June 5,2020 there were 293,033 employers and 2.3 million employees covered under the Wage Subsidy Programme (WRP). This indicates that more than half of the existing SMEs have yet to benefit from the financial assistance.

As for the micro-credit scheme by Bank Simpanan Nasional and Tekun, 48.8% of RM700mil have been approved and 19,536 micro enterprises have received the assistance as of June 5,2020, which is equivalent to only 3.5% of total micro SMEs in the country.

The existing financial assistance has not yet been fully utilised by the SMEs. It is indeed crucial for SMEs to take advantage of this package in order to sustain their businesses. Otherwise, there could be distortions in the labour market given that SMEs are the main drivers of labour market equilibrium in Malaysia.

SME jobs under threat

The International Labour Organisation (ILO) estimated that 1.25 billion employees around the world (38% of global labour force) face high risks of pay cuts or layoffs.

According to ILO, jobs that are at risk are mainly concentrated in the wholesale & retail trade, food services, accommodation as well as real estate & business sectors.

These sectors are labour intensive and employ millions of often low-paid and low-skilled workers. Domestically, the majority of businesses in the above mentioned sectors are SMEs, making them most vulnerable to the crisis.

The Covid-19 pandemic has pushed the Malaysian retail industry into negative territory, contracting by 18.8% y-o-y during 1Q20, marking the sharpest contraction since 1998. Wholesale & retail trade makes up the largest portion (51.2%) of the SME services sector and almost 41.5% of micro enterprises.

If the situation does not improve, we foresee that up to 45% of the wholesale & retail sector might have to downsize or shut down over the next three months.

Most retail businesses are expected to experience a severe fall in sales turnover amid the significant deterioration in consumer confidence, changes in consumer spending behaviour and drastic decline in tourist arrivals.

Our analysis also shows that the possible shutdown of these businesses could translate into approximately 28.5% of the labour force within this sector being unemployed.

The situation is similarly challenging for the accommodation sector. Initially, 2020 was expected to be a big year for Malaysia’s tourism sector with hotels and airlines anticipating millions of tourist arrivals and billions in tourist receipts.

The impact of Covid-19 has been severe on the accommodation sector due to restrictions imposed, despite hotels being listed as an essential service and allowed to operate during the MCO.

Some hotels operators have indicated that they would remain closed until the end of year, while some will only resume operations after a Covid-19 vaccine is widely available.

As such, we expect up to 40% of the accommodation sector to close down either temporarily or permanently, leading to about 200% potential job losses within the sector.

If the MCO is prolonged beyond a certain period, there could be over a million job losses in the SME segment alone.

Business strategies

According to our estimates, we project unemployment rate to reach its peak at 7.2% from April to June, based on current market conditions. Job losses in SMEs are estimated to be 1.04 million – translating into 6.6% of unemployment rate of the total labour force.

The services sector is expected to be the worst hit with almost 27% job losses, followed by the manufacturing sector (18.5%). Around 95,000 job losses are estimated to come from the non-SME sectors, translating into 0.6% of unemployment rate.

On a positive note, around 480,000 jobs are expected to be protected under the recent Penjana stimulus initiatives, driving down unemployment rate by 3% from our previous forecast of 10.2%.

Besides the government and central bank’s stimulus measures, it is crucial for SMEs to re-invent their business strategies to overcome these difficult times and minimise their losses.

Firstly, SMEs should review their business operating models and modify their business operations quickly to adapt to current market conditions.

As their existing operating models might not be efficient post Covid-19, SMEs should look into new business approaches to ensure long term sustainability.

There is a fundamental need for SMEs to change their businesses to online platforms as the unprecedented lockdown measures have drastically changed consumer behaviour.

Next, SMEs should engage in product development strategy to develop new or modify existing products to open up new markets, or at least to cater to current demand.

These strategies typically emerge when there is little to no opportunity for new growth. As such, creativity and innovation play key roles in establishing SMEs that are capable of catering to market changes.

Digital and new technology adoption are crucial in handling the uncertainties triggered by the pandemic.

Before the Covid-19 pandemic, the adoption of information technology (IT) and digital infrastructure (such as e-commerce) among SMEs were accelerating. This should be further ramped up to empower a remote workforce, reduce operational costs and enhance supply chain continuity.

South Korea and Taiwan are among the few countries that have utilised digitisation and technology to respond quickly to the crisis and minimise disruption to business activities.

Moving forward, new technology infrastructure and digitalisation should be the key enablers that SMEs need to prioritise to survive the challenging post Covid-19 era.

SMEs also need to improve their risk management processes. During crisis, firms need to carefully assess potential losses and costs which could be caused by risky business decisions.

It is essential for businesses to identify risks, attribute a value and priority scale, design mechanisms to minimise risks and continuously monitor them to enhance survival. This is especially true for SMEs as they are mostly exposed to the risks due to their limited resources and structure.

Formalisation of unregistered businesses is another measure for SMEs to foster sustainability and productive development in the long term.

The stimulus measures announced for businesses are currently only applicable to those registered with the Companies Commission of Malaysia (SSM). The unregistered businesses have not gained access to stimulus measures and have been left behind without any financial assistance.

This could lead to severe job losses especially among the daily wage earners, petty traders, hawkers and stall operators that comprise the largest group of informal sectors. It would be beneficial to facilitate the formalisation of unregistered businesses through regulatory and promotional components.

Typically, the regulatory component should focus on simplifying the registration process for informal enterprises and extending the benefits of formalisation. The high cost of registering and running formal enterprises are the main reasons for informality. An eased regulatory framework could lead to more registered businesses in the formal sectors.

The promotional component could be implemented to provide assistance to the newly formalised sector in terms of technical standards, job training and administration to thrive in the formal business environment.

This is oriented toward fostering employment and income generation with more formal SMEs in the long run. Consequently, this would increase value-added contribution to the nation’s GDP.

In a nutshell, saving SMEs during this pandemic crisis is a top priority. The sector plays a vital role in driving the overall economy in the short and long term. If Malaysian SMEs fail to rebound,

Malaysia’s economic growth may deteriorate even further. Unemployment rate could easily soar to double digits, which we have only seen during previous economic crises.

Manokaran Mottain is the chief economist at Alliance Bank Malaysia Bhd. The views expressed here are the writer’s own.

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