Cover Story: SMEs and gig economy to bear the brunt of MCO

This article first appeared in The Edge Malaysia Weekly, on March 23, 2020 - March 29, 2020.
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IT is a difficult situation currently for businesses and employees everywhere, but it is particularly challenging for small and medium enterprises (SMEs) and those in the gig economy.

While most of these smaller businesses and self-employed individuals would agree that the Movement Control Order (MCO) is necessary to stem the spread of Covid-19 in the country, they cannot help but be concerned should it be extended beyond two weeks.

“For two weeks, we should be okay. Currently, our team is working from home on ongoing projects. We are only a 20-man company, so meeting our staff salaries at the end of the month is not an issue. But, if the MCO is extended for a longer period of time, then I would start to be a little bit more worried,” says an owner of an engineering outfit that works on a project basis.

SMEs represent 98.5% of companies in Malaysia. In its 2018 annual report, Bank Negara Malaysia said there were about one million such establishments in the country.

In terms of contribution to the economy, SMEs accounted for 38.3% of Malaysia’s gross domestic product (GDP) in 2018, or in value terms, over RM500 billion.

A large portion of the SMEs, or 62%, are in the services sector. Any worsening of the Covid-19 situation and extension of the MCO would have a severe impact on them, and the economy.

Dr Yeah Kim Leng of Sunway University Business School says the majority of businesses in the retail, restaurant and food and beverage (F&B) sectors, as well as travel and tourism-related players, are SMEs.

“While SMEs are touted to be agile and adaptable to the changing economic and business environment, they will be affected by a downturn whether it is short or prolonged,” says Yeah, a professor of economics.

SME Association of Malaysia president Datuk Micheal Kang believes that if the MCO is prolonged beyond a certain period and little or no help is given to the sector, there could be over one million job losses in the SME industry alone.

Last Thursday, the government announced measures to help SMEs. It will provide financial assistance — in the form of loan facilities and rescheduling and restructuring of payments — to help these businesses maintain their operations, continue to employ workers and encourage domestic investments.

Banks have also announced relief measures to support affected customers.

A former bank CEO highlights that the many of the local banks hardly service the micro SMEs, except for development banks. In recent times, micro SMEs have turned to peer-to-peer lending platforms to raise funds. 

“Looking at the statistics from crowdfunding platforms offering loans to micro SMEs,  9% are already three months delinquent to date, before the Covid-19 effect. And those that are delinquent less than three months are 12%, and they will turn into non-performing loans (NPL) with this MCO. With an extended MCO, more performing portfolio non-delinquent accounts will start to go into delinquency. This will show up as NPLs in the third or fourth quarter of the year,” he says. 

Italy is an example of how the spread of Covid-19 has gone from bad to worse. The Italian prime minister recently announced that the lockdown of the country would have to be extended beyond April 3 as the death toll spiked. Italy has been on lockdown since March 9.

Economists are expecting the Italian economy to contract by 0.4% this year.

While the fear of an extended MCO is real, small businesses are hoping that the government can lend more support. One of their main grouses — which is being hotly debated — is that they are not allowed to put their employees on unpaid leave during this period.

Kang says there is still a lot of confusion among businesses as to what the MCO means for businesses.

“The guidelines aren’t clear and the message hasn’t been passed down well. So, businesses use their own interpretation and this has caused a lot of confusion. The MCO is not a holiday, businesses are still ongoing, they can work from home. They are also working out how to operate their business during this time,” he says.

While many small businesses are struggling to figure things out, some seem to be well prepared. Larry Leong (not his real name) and his family operate optometrist outlets in the Klang Valley. They have been in business for over three decades. He emphasised the importance of having good cash flow at all times.

“We have gone through at least four cycles of tough times. I’ve learnt that the best way to prepare for any slowdown in business activities is to have good cash flow. That means prudence in buying products and ensuring that repayments are manageable,” he says.

Another segment of the economy that are vulnerable to the MCO are those in the gig economy. According to World Bank Data, 25.3% of the Malaysian workforce, or about four million people, were freelancers in 2018, and this number is expected to grow.

The nature of their work and irregular income puts them at greater risk in tough economic times.

Irene Lim (not her real name), a freelance ballet teacher and Pilates instructor, says she will depend on her savings, as she will have no income, with dance studios and gyms closed during the MCO.

If the order is extended, however, she would have to resort to drastic measures such as selling her car.

She says a reduction in tax rates this year would be really helpful to freelancers like her who are in the same predicament.

Lim has resorted to offering free online ballet classes to her students to maintain her relationship with them.

SME Association’s Kang is concerned that the MCO may be extended, similar to what Italy is facing.

“In fact, I foresee we could be in a worse situation than that because people don’t seem to understand how serious this is.

“This year has so far been worse than last year in terms of business. Now, we will need to see how well Malaysia controls this pandemic and, if we manage to do it, the second quarter should be better,” he says.
 

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