This article first appeared in The Edge Financial Daily on September 28, 2018

KUALA LUMPUR: While firms remain optimistic going into 2019, that optimism has been moderated amid the on-going US-China trade spat, and as businesses transition to the new sales and service tax (SST), according to the latest RAM Business Confidence Index (RAM BCI) survey.

As such, while still in the positive territory, the quarterly survey’s Corporate Index reading for the six months spanning the fourth quarter of 2018 (4Q18) to 1Q19 slipped 1.1 points to 55.7, compared with the 3Q18 to 4Q18 period.

The Corporate Index is one of two components of the RAM BCI that are jointly conducted by RAM Holdings Bhd and RAM Credit Information Sdn Bhd. The other is the SME Index, whose reading rose from 52 to to 53.5.

The RAM BCI surveys about 3,500 small and medium enterprises (SMEs) and corporates across five main industry segments to gauge business sentiment in the country by measuring forward-looking expectations. An index value of 50 is the neutral benchmark, above that indicates positive sentiment while below that is negative.

In a joint statement, the two firms said the latest readings signal a slight moderation in firms’ sentiment on their business performance and demand prospects in the next six months. In particular, they show that firms with more exposure to the ongoing trade spat between the US and China are now less optimistic.

“The export-oriented Corporate Index has been declining since 2017; this trend is also consistent with the slower export growth observed to date, following the rebound last year.

“Given the forward-looking nature of the survey responses, we do not expect export growth to pick up in the near term, although growth should remain sturdy given the still-positive reading of 57.6. The external downside risk pressures have also weakened the sentiment of manufacturing corporates and SMEs,” they said.

The transition to the SST, which started on Sept 1, has also affected manufacturers’ expectations of future demand and profitability, which resulted in lower corporate and SME turnover and profitability expectations.

The tax impact is not only confined to the manufacturing sector as margins of the wholesale sector, which serves as a bridge between manufacturers and retailers, may also be compressed by the potential pass-through of additional SST expenses by manufacturers, the two firms said.

“As such, this sector (wholesale) also registered a drop in the sentiment on turnover and profitability ... Greater concern over heightened competition within the wholesale sector also limits firms’ ability to pass on this cost, thus compounding their pessimism,” they said.

Trends in sentiment are sector-oriented, they said, citing the steep decline seen in the agriculture/mining performance-based indices to negative territory due to sector-specific policy changes, price weakness and demand challenges.

In contrast, transport and storage firms’ sentiment on business performance remained strong, with their sentiment reading rising in both the corporate and SME sectors, as sentiment on turnover and profitability became positive.

“The more upbeat outlook for this sector is mainly attributable to logistics, shipping and oil tanker services, particularly oil and gas support services, which are enjoying healthier business prospects amid strong oil prices,” the statement read.

As short-term economic uncertainties remain, most notably from repercussions of the ongoing US-China trade war, it added, more guidance on future economic policies that will shape overall business environment will be crucial to business confidence and help drive sustainable economic activities.

ensions