Small Medium Enterprise Development Bank Malaysia Berhad (SME Bank) 1H23 SME Sentiment Index survey conducted from January to May 2023, has generated a positive reading of 52.9, indicating the sustained health of the Micro, Small, and Medium Enterprises (MSMEs) sector as a whole.  

SME Bank’s Group President/CEO, Datuk Wira (Dr.) Aria Putera Ismail said, “The Index findings tell us that business owners are still optimistic, resilient, and adaptive although the results recorded were slightly lower than 2022’s reading of 53.8.

“The 1H Index reading is in line with the country’s economic slowdown foreseen this year where SME Bank as well as the Ministry of Finance and Bank Negara Malaysia also expected Malaysia’s gross domestic product to continue growing between a range of 4.0% YoY to 5.0% YoY, moderating from 8.7% YoY in 2022.” 

SME Bank’s Chief Economist, Lynette Lee commented: “45% of the respondents predominantly the micro and small enterprises foresee a slowdown in the economy over the next 6 to 12 months.

“By sector, the moderation primarily stems from various sub-sectors within the services industry, namely electricity, gas, steam, and air conditioning supply (Utility), real estate and retail.

“However, 44% of the medium and large size businesses, anticipate further expansion in economic activities. This disparity in expectations reflects the varying circumstances and challenges faced by businesses of different sizes.”

The respondents’ outlook of an easing economic growth trend is aligned with the high cost of living, which could restrict purchases, particularly in discretionary or big-ticket items.

Conversely, respondents in the mining sector exhibit the most optimism where 86% have indicated brighter economic prospects and the business environment over the next 6 – 12 months.

This optimism is fueled by the sustained high Brent oil price, surpassing its long-term trend, and subsequent recovery in travel and tourism. Consequently, transportation sector respondents, at 45%, also anticipate further growth in the overall economy.

Mitigation Plan During Economic Slowdown

Apart from waning pent-up demand, the economy is expected to cool down this year in the face of elevated inflation and a higher interest rate environment. As 87% (2022: 95%) of the respondents foresee the rising cost of doing business, 80% opt to cut operating costs by reducing labour costs or seeking more competitive suppliers.

While 75% of the respondents are willing to invest in their employees by providing additional training for reskilling and upskilling, 58% are ready to automate their business operations in order to sustain their businesses. 

Aria said, “Two-thirds of respondents have indicated that digital transformation is impactful to their business performance. This result is in step with the World Bank’s Malaysia Economic Monitor Report where half of the MSMEs that have increased the usage of digital platforms and current digital adoption consider digital transformation a permanent feature.”

Sustained Confidence in Sales and Profitability

Despite a slightly less optimistic outlook compared to the previous year, MSMEs remain upbeat about their sales and profitability. The majority of MSMEs expect an increase in sales performance where mining and quarrying (86%) being the most bullish, followed by financial services (75%) and construction (74%).

Although higher revenue doesn’t always result in better profit, 60% of MSMEs still anticipate an increase in profit.

Focus on Employment Growth

The Index also revealed that 61% of MSMEs plan to increase their hiring to meet growing demand. By firm size, higher hiring expectation is concentrated in the micro-enterprises at 40% followed by medium at 30%; small at 25% and large at 5%. However, most of the MSMEs prefer hiring contract workers to have more flexibility in planning their business operations.

Inflation Impact and Rising Costs

While MSMEs are steadily picking themselves up during this economic recovery phase, business climate remains challenging which affects their progress to a certain extent. 87% of the respondents cited inflation as the top impactful factor to MSMEs’ business performance, followed by changes in government and its policies (70%) and digital transformation (68%).

Need for Financing and Building Reserves

The Index also highlights that close to 80% of MSMEs have indicated the need for cash assistance via financing, despite the rising interest rate environment and 48% of respondents are looking for additional financing to manage their working capital or operating expenditure, largely in ICT  and financial services. 

Lynette said, “While the SME Bank 1H 2023 SME Sentiment Index score of 52.9 still portrays a somewhat optimistic outlook, the result actually eased from last year’s SME Sentiment Index finding of 53.8.

“Hence, we remain cautious about the developments on both domestic and external fronts. The tighter global monetary policy environment, mounting geopolitical tensions, elevated inflation and risk of recession in certain advanced economies could have spillover effects to the domestic economy and derail our recovery trajectory.”

The survey garnered more than 700 respondents from various sectors and sizes of Micro, Small and Medium-sized Enterprises. A leading economic indicator, the Index serves to gauge MSMEs’ view of the business environment which can be the yardstick in measuring how the overall economy is expected to behave.

The full report of the SME Sentiment Index 1H 2023 published by SME Bank can be obtained at https://www.smebank.com.my/images/2023/Snapshot_SMESentimentIndexH2023.pdf 

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