KUALA LUMPUR (Jan 7): Business confidence, as measured by the RAM Business Confidence Index (BCI) from a poll of some 3,500 firms in Malaysia on their sentiment in the first six months of 2019, has fallen to the lowest level since the index began tracking in 2017.

One of the key factors driving firms' sentiment this year is the weak economic prospects over the next six months, said RAM Holdings Bhd in a statement today.

"The number of firms citing weak economic conditions as their main challenge within this period spiked up to 41% and 41.2% of the overall firms surveyed in their respective segments; this is also the most frequently cited challenge for both segments.

"Decelerating domestic growth, uncertain global demand and investment activities as well as a lack of positive catalysts, including the relatively neutral Budget 2019, all play a part in the generally weaker business sentiment on the next six months," said RAM.

The RAM BCI comprises the corporate and small and medium enterprises (SME) indices. For the first quarter to second quarter (1Q-2Q 2019), Corporate and SME indices fell to a respective 55.1 and 51, the lowest points.

"While an index value of above 50 still denotes positive sentiment, the current downtrend suggests that businesses have a less upbeat outlook on 2019," RAM said.

Data for the RAM BCI was collated from the survey of 3,500 SMEs and corporates across five main industry segments in the country. The survey was jointly conducted by RAM and RAM Credit Information Sdn Bhd.

Business expansion, capital investment and hiring at their lowest levels

Amid the weaker prospects, firms are holding back on capacity building, RAM said.

"The sub-indices that track corporate business expansion, capital investment and hiring have fallen to their lowest levels since the inception of the RAM BCI, after having declined in three consecutive surveys.

"Likewise, the capacity-building sub-indices for SMEs also pulled back from the last survey and remain below those of corporates," the firm said.

RAM noted that firms' expressed reticence on capacity building remains the most prominent downside risk, as it could weigh on the momentum of economic growth in 2019 and potential economic output over the longer run.

"This is particularly true in respect of SMEs, which are more vulnerable and sensitive to immediate economic challenges.

"That said, more guidance on future economic policies that will shape the overall business environment will be crucial to building business confidence among firms, potentially being the game changer for a more resilient growth trajectory this year," said RAM.

The construction sector, notably, was the least bullish among both corporates and SMEs. RAM said the SME construction sector sub-index was the only one with a negative sentiment reading (at 49.7) while its corporate counterpart declined for the third consecutive time to 53.

"Without any new growth catalyst amid the overhang in the property segment, plus the shelving of new big-ticket infrastructure projects, it is not surprising that the construction sub-indices have hit record lows.

"Another sector that displayed pessimism in the 1Q-2Q 2019 survey is SME retail; this sector's performance outlook slipped back into negative territory after a brief expansionary momentum that had been aided by the tax-free window from June to August 2018.

"Faced with uncertain global and domestic economic prospects, consumers are once again more prudent with their spending, leading to weaker sentiment on retail consumption in 2019," said RAM.