Malaysia’s coming SME crisis

FMT:

Malaysia’s coming SME crisis



Late last year, most economists saw the world coming out of the Covid-19 pandemic in a slow, but smooth nature. Very few predicted a massive rise in oil and gas prices, disruption to major international supply chains, and rises in the prices of essential raw materials required by the manufacturing sector.

The Russia-Ukraine conflict has brought much uncertainty to the world economy.

In Malaysia, inflation slowly trickled into the economy through the rise in prices of industrial and agricultural inputs early in the year.

First, we saw the chicken crisis, then rapidly rising prices for market vegetables, and eventually processed foods. Local inflation has been exacerbated by a weakening ringgit, heading towards RM4.5 to US$1.

Given the exponential growth in the local money supply, high budgetary spending, the withering ringgit and expanding money supply within the economy, a perfect economic storm is brewing, fuelling inflation.

Estimates put the annual inflation rate around 8% to 9%, based on the last four monthly figures. Official estimates appear to be lagging behind.

Unfortunately, inflation is expected to stay and peak near the end of 2022, where relief may only be seen in the third quarter of 2023. In addition, with housing prices beginning to weaken, and searing public and private debt levels, there is great danger the economy will slip into what is called stagflation.

Stagflation is a condition where an economy experiences high inflation and an economic recession where growth becomes negative. This not only dampens demand, but provides fewer opportunities for employment.

In the Malaysian context, this will also mean a growing number of households heading into relative poverty. Although Bank Negara Malaysia predicted 5.3% to 6.3% growth in GDP only last month, conditions have greatly deteriorated since that estimate was made.

The only saviour for the Malaysian economy is the current export boom. The nation’s export-orientated industries are prospering, as is Petronas with the high price of oil. Malaysia’s corporate economy is robust, with the banking sector making bumper profits, telcos and high-tech companies growing, and companies operating within monopolistic or oligopolistic conditions showing strong profit levels.

Not rosy for SMEs

However, small and medium enterprises (SMEs) that usually operate with hand-to-mouth cash flows, lacking capital to expand, and dependent upon their local markets, are feeling the pinch. Households facing rising food prices, with relatively lower wages due to inflation, are curtailing their spending.

Many SMEs just barely survived the MCOs during the Covid-19 pandemic and will be further strained with dampened demand. SMEs’ worst nightmare hasn’t arrived yet. When it does, it will be potentially devastating.

Interest rates are on the way up once again. Most SMEs with overdraft and other forms of bank loans are paying 7% to 9% interest now. However, with Bank Negara Malaysia under pressure to increase interest rates to curtail inflation and prop up the ringgit, SMEs may have to pay anything from 12% to 16% by the end of the year, if conditions further deteriorate.

It’s highly unlikely the government will be able to do much fiscally in the upcoming budget to curtail the growth of inflation.

Cost-cutting options are decisions too hard for the current government to make, especially with a federal election looming before September 2023. Even if the government introduced a GST at the coming budget to widen the taxation base, it would take around a year to implement.

The only hope for the government to soften the impact on inflation from the coming budget is to call in special payments from Petronas, as it has done many times in the past.

Strategies needed before the crisis

None of this is going to take away the albatross of high-interest payments from the SME sector. The federal government and the banks, of which the government through GLCs are major shareholders, must come up with “out of the box” solutions, otherwise SMEs, which contributed more than 36% to GDP in 2020, are going to face strains which many won’t be able to survive.

The first option would be for the federal government to provide extra tax rebates on interest paid by SMEs. This type of subsidy could provide some cushioning. If this could somehow be worked as a monthly payment, then SMEs will have a better chance of staying afloat. This could be rolled out in the coming budget.

Secondly, the banks which have been enjoying bumper profits and capitalisations could offer rebates to customers who promptly make loan repayments. This, from the point of view of the banks, would be a great incentive against late payments.

Banks have the financial buoyancy to undertake this initiative, which wouldn’t affect their overall profitability too much. The federal government, as a major or majority shareholder in most of the nation’s top banks, is in a good position to persuade the banks to undertake such, or a similar, initiative.

SMEs themselves have to heed the coming storm and prepare as best they can. Prices will continue to rise, liquidity will further be strained, bad debts will increase, similar to the Asian financial crisis back in 1997.

Those who survived those times must remember what worked and didn’t work and pass the lessons onto SME proprietors who didn’t experience those times.

Counterintuitively, SMEs could be assisted in expanding their markets, and thus sales, through expanding their distribution to new markets and geographical areas. The original One Tambon One Product programme (OTOP) introduced in Thailand back in 2002 was very successful at this and could be a case study.

In addition, local substitutes for imported raw materials need to be considered and developed. This could be a shining time for Malaysia’s local engineering-based universities, which are under-valued for the good research work done within this field.

In a crisis, there are also opportunities. Grassroot micro-finance and peoples’ saving cooperatives could be set up and developed to assist with micro-enterprises, which make up a large proportion of the SME sector.

If inflation starts growing at rates in excess of 3% per quarter and the ringgit drops to RM5 to the USD, then it may be necessary to look at using community currencies based on intrinsic rather than fiat value.

This will return the “store of value” quality back to currency and potentially stabilise prices within local communities.

Above are some random ideas. What’s necessary now is that the government and SMEs start preparing strategies to survive the coming crisis. These can be incorporated into the coming budget.