AS the trade war drags on, larger SMEs may bear the brunt as Malaysia’s exports are expected to take a hit, says a report by MIDF Research.
In its note last week, MIDF says a full blown trade war between the US and China could cause Malaysia’s exports to fall by 10%. This is in line with its observation that Malaysia’s outbound shipments would not contract more than the -15.7% year-on-year seen during the global financial crisis in 2009.
In addition, the diversification of export products and destinations in recent years has indirectly reduced the economic shock impacts on Malaysia’s external front.
But it expects large SMEs to suffer the most from this contraction.
“Based on our modelling results, the trade war which will drag Malaysia’s exports growth (is likely) to cause large SMEs by -6.4%, followed by medium and small SMEs by -5.6% and -4.9% respectively. The smallest SMEs will contract at the very least size of -3.9%.
“The results are in tandem with the exposure of each SMEs to external trade activities. Almost 70% of large SMEs’ activities are driven by the export market, whereas micro SMEs are exposed to outbound shipments at 34.7% only, ” it says.
Other than SMEs, the trade war will reduce overall economic growth by 4.8%, compensation of employees by 3.5% and operating surplus by 5.3%, the report adds.
MIDF notes that there are weak linkages between large and other SMEs. Almost half of Malaysia’s economic activities are supported by large SMEs at about 48%. Meanwhile, small and medium SMEs contribute about 13.4% and 13.9% respectively while micro SMEs contribute some 4.7% to economic activities.
“Looking at each SME, large SMEs only require small portions of input from other SMEs at less than 30%. On the flip side, large SMEs provide significant support to the micro, small and medium SMEs at 14.5%, 25.9% and 40.4% respectively, in terms of inputs.
“Simply put, the other SMEs are rather inefficient in producing their output without the assistance of large counterparts. On the other hand, large SMEs can stand alone as more than half of its inputs are supported by the companies themselves. Based on this structural analysis, there is a weak interlink between large and other SMEs in Malaysia’s economy, ” it says.
The electrical and electronics (E&E) industry is expected to be the main victims of the trade war. Most of the E&E products across all SMEs are expected to experience contractions if exports are reduced at 10%. MIDF sees industrial process control equipment, electrical machinery, domestic appliances and semi-conductor wires as among the main products to be affected if the trade war worsens.
Other than E&E products, productions of footwear and rubber are also expected to be impacted. Some 60 to 70 other products such as basic metals, crude oil and gas and palm oil are expected to also take a hit.
“Most of the sectoral impacts from the trade war on large and small SMEs cover electrical machinery, domestic appliances, semiconductor devices and optical instruments, which are usually transported via air freight, ” it says.
This will also affect logistics players.
Based on external trade data, MIDF says Malaysia registers trade deficit with China while showing a surplus with the US. The external trade expansion rate with both economies have been moderating since 2018 due to the trade war.
Among others, high imports of manufactured goods, machinery and transport equipment, miscellaneous manufacturing articles and food and live animals from China have caused the widening trade deficit. Malaysia has comparative advantage on certain products such as crude materials and mineral fuels with China.
Across the globe, Malaysia has a trade surplus with the US at RM25.9bil in 2019, MIDF says. Overseas sales of machinery and transport equipment, miscellaneous manufacturing articles and manufactured goods among others, contributed to the net exports with the US.
“Despite the trade war, we do not observe significant changes in the patterns of trade balance with both economies, ” it adds.
MIDF also observes a change in Malaysia’s dependency on both countries since the global financial crisis.
“The exports and imports shares of the US in Malaysian external trade market have been falling. Exports share from 20.5% in 2000 declined to 9.1% in 2018. On the other hand, China holds a larger share in the export market at 13.8% in 2018.
“Nevertheless, both economies still play significant influence on the Malaysian economy directly and indirectly, ” it says.