The survival of SMEs vital to Malaysia’s economy

Professor Dr Yeah Kim Leng (Photo by Sam Fong/The Edge)

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The economy is taking a major hit because of the Covid-19 pandemic, with consumer spending decreasing significantly and supply chains being disrupted globally. While companies are grasping at straws to keep afloat, the big question is what happens after the Movement Control Order is lifted.

Sunway University Business School economics Professor Dr Yeah Kim Leng tells Enterprise that the economic cost to firms will increase exponentially with the MCO duration. Already, he estimates that the losses in terms of gross output or total revenue for just a one-month period ranges from RM75 billion to RM150 billion.

If the SMEs do not recover, he adds, the country’s GDP growth will be lowered significantly, while unemployment rates will soar past the 4% level. SMEs contribute about 38% to GDP and account for 60% of total employment in the country. Most, he adds, have enough reserves, surplus cash and credit lines to survive for about three to six months.

Taylor’s University’s School of Management and Marketing, Faculty of Business and Law associate professor Dr Hafezali Iqbal Hussain says past crises have demonstrated that when global-scale disasters occur, it takes the economy a few years to recover.

“This can be observed in the post-1997/98 and 2007/08 crisis. In addition, we also need to note that Malaysia is an export-oriented country and those factors will also weigh in when we talk about economic recovery,” says Hafezali.

Being an export-oriented country, Yeah points out that it will be hard for Malaysia to dodge the bullet when it comes to the looming global recession, which appears inevitable, given the severity of the Covid-19 pandemic in developed countries.

“Moreover, a simultaneous collapse in both domestic and external demand invariably results in a sharper economic decline despite the offset by the economic stimulus packages,” he says.

But it is not all doom and gloom. Yeah points out that Malaysia’s diversified economy, rich natural resource endowments, strong banking sector, ample international reserves and current account surplus have placed the economy in a favourable position to stage a robust recovery.

“The prospects for a V-shaped recovery for Malaysia in the second half of this year however has diminished with the further MCO extension and continuing restrictions expected to be in place to ‘flatten the curve’ in the crucial months ahead. A U-shaped recovery is more likely now with growth picking up at the earliest in the first half of 2021.

“Moreover, the recovery in domestic and external demand is likely to be gradual as the pandemic shutters the global economy, disrupts supply chains, puts off investments and splutters Malaysia’s export-oriented industries.”

But Hafezali points out, despite the economic cost, the government is only doing what it has to, to save lives. He too, is determined to look for silver linings. “Certain sectors such as transportation, medicine, supply centres for masks, are quite resilient and in the short run, we will see more investments moving to this sector, which will also help the economy at the macro level.”

Yeah says the government has been pragmatic and responsive in launching the two stimulus packages in a short span of two months, making the necessary adjustments in response to criticisms and feedback. The income support and handouts are a welcome relief for the low-income households although widening its coverage to less-affected groups such as civil servants has been criticised.

“The second package was aimed principally at the SMEs, which did not receive much support in the first package apart from the incentives contained in the Feb 28 stimulus package provided by the previous administration. 

“The increased scope and size of wage subsidies are helpful to ease the financial burden faced by SMEs. Quick and effective rollout of the aid remains the key to limiting the number of firms going under, especially if the MCO is further extended,” says Yeah.

He adds that the RM3,000 grant to be doled out to the 700,000 micro enterprises, while small, will be a helpful financial relief to help tide them over the MCO period.

“[Matters] of concern are the daily wage earners, petty traders, hawkers, stall operators and freelancers who do not have a registered business and therefore fall outside the ambit of the financial aid. These informal sector operators will have to rely on the financial assistance provided under the direct household income transfer programme (BSH).”

Meanwhile, Hafezali says that the stimulus packages are quite elaborate in proportion to the country’s gross domestic product (GDP) and have already been enhanced once. The challenge now is how the stimulus package reaches the SMEs. 

“Whether the stimulus package is a short-term or long-term idea will depend on the purpose of the stimulus — whether it is created for job retention or business continuity. 

“While these measures are aimed at easing liquidity constraints as well as avoiding a painful and prolonged recession in the short run, the rebound as a result of these intervention mechanisms would lead to higher growth in the recovery stage.

“For SMEs, the biggest challenge [will be] regaining consumer confidence, pivoting their businesses and adopting more digital technologies.”

Long-term digital solutions

More needs to be done with the stimulus packages. Yeah says there are measures in the stimulus packages to support business expansion, investment and acquisitions such as the RM50 billion loan guarantee to facilitate access to credit. Other funds such as the RM300 million SME automation and digitalisation facility and Securities Commission’s RM500 million co-investment fund are available to achieve the intended purposes but these are not sufficient to elevate the SMEs to a new level of technological prowess. 

“The long-term sustainability and dynamism of the SME sector will require a larger pool of entrepreneurs with strong technological capabilities, driven by innovation, an active venture capital and private equity industry, and a vibrant industry-university-research centre ecosystem that drives industrial research and development and innovations,” he says.

Economists are not ruling out the possibility of a third stimulus package that would help SMEs to further their cause, says Hafezali. The potential of this happening would of course depend on the severity of the fallout in terms of loss of confidence in the economy, which results in reduction in spending, as well as the quantum of job losses.

“It would require an assessment of the situation and quite possibly merit enhanced measures that are aimed at encouraging growth at the same stage of the recovery process, given that current packages are aimed at minimising job losses and ensuring continuity of business during and post-MCO,” he says.

“The MCO has also highlighted the adaptability capacity of SMEs, as many go down the digital route and explore more online channels to sustain their business. We are seeing a rise in e-commerce, more SMEs turning to digital marketing, enhancing the digital transformation wave.”

Hafezali says while there will be an impact on the supply chain in Malaysia, in a globalised economy, SMEs will play an important role in supporting the supply chain. Initially, SMEs were more inward-looking, but with globalisation, Hafezali says, we are seeing them fill larger shoes by stepping into various sectors such as logistics and transport.

“In the global supply chain, SMEs play a significant role considering that they employ a vast proportion of the population and are therefore taking on that household responsibility. This is based on the home market effect where multinational corporations would be keen to set up in such an environment where the existing ecosystem is able to support operations.”

“Post-MCO, the survival of SMEs will really depend on their ability to adapt and introduce new working styles and business strategies.”

A good example of this, says Hafezali, would be the upcoming Ramadan bazaars in several states, which have shifted to a different business model that includes incorporation of drive-throughs, e-hailing delivery services as well as pack and pick rather than the traditional model that was previously practiced.

“In the post-MCO period, we are likely to witness a pick-up in the sectors that are hardest hit, given pent-up demand being released. Thus, SMEs should plan ahead to cope with the spike in demand,” he points out.