Article
SMEs’ Outlook Amid Economic Prospect for 2021
4 Jun 2021
3 Min Read

The Covid-19 pandemic has triggered major disruptions in the global economy.

Economic activities have been constrained as people reduce physical interactions, owing both to official restrictions and private decisions; uncertainty about the post-pandemic economic landscape and policies has discouraged investment; disruptions to education have slowed human capital generation; and concerns about the viability of global value chains and the course of the pandemic have weighed on international trade and tourism.

 

In a downside scenario, global economic growth could only reach as high as 1.6% in 2021 if Covid-19 infections continue to surge and vaccine rollouts are delayed. This would result in deterioration in business activities and financial conditions. Nevertheless, in an upside scenario where the pandemic is successfully contained and vaccination has a more rapid process, global gross domestic product (GDP) growth could accelerate to nearly 5% this year.

 

According to the World Bank's baseline forecast on major economies, the U.S. is projected to grow by 3.5% in 2021 following an estimated decline of 3.6% in 2020. The eurozone economy is expected to expand by 3.6% after shrinking by 7.4% last year, while Japan's real GDP is forecast to rise by 2.5% this year after contracting by 5.3% in 2020. Malaysia’s largest trading partner, China, is expected to accelerate growth to 7.9% from 2% last year. India is forecast to post real GDP growth of 5.4% after a 9.6% contraction in 2020.

 

On the homefront, Malaysia’s economy is expected to grow by 6.7% in 2021 following a projected contraction of 5.8% in 2020 caused by the Covid-19 pandemic. The successful containment of the third wave and effective roll out and distribution of vaccine could lead to a faster-than-expected recovery in consumer demand, greater investor confidence, and consequently a more robust recovery in domestic economic activity in 2021.

 

Signs of recovery are showing with Malaysia posting a smaller contraction of 2.7% in the third quarter of 2020 compared to a 17.1% in the second quarter of 2020. Fiscal measures like cash transfers and wage subsidies have boosted household spending with private consumption contracting 2.1% in the third quarter of 2020 compared to 18.5% in the second quarter of 2020. However, the recent surge in Covid-19 cases and renewed movement controls could slow recovery down due to uncertainties surrounding the deployment of an effective vaccine and the robustness of a rebound in global growth that will influence growth prospects. Containing the pandemic and protecting the most vulnerable remain the topmost near-term priorities.

 

Malaysia is expected to return to its pre-pandemic trend at a modest pace over the medium term. As health risks moderate and the economy continues to recover, focus will need to gradually shift from these near-term policies to facilitating necessary economic adjustments to enable new growth in the post-pandemic environment. Furthermore, the country needs to take advantage of its recovery from this crisis to emerge as a more durable and inclusive economy in a structurally different post-pandemic future.

 


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SME Business Outlook

Although the small and medium enterprises (SMEs) are worried about the intermittent risks posed by Covid-19, they are somewhat confident in the government’s management of the pandemic situation. Most entrepreneurs and industry players are generally concerned about severe supply chain disruptions and business operations, as a result of the movement control order (MCO) imposed to control the spread of Covid-19. The surge of new cases of Covid-19 means that the imposition of the MCO has to be continued over time and businesses have to respond by taking strong precautions. This includes reducing operations to curb costs and stay afloat.

 

As a result, entrepreneurs remain quite optimistic for the year 2021 as most of them are already internalizing the cost-cutting measures, as well as the availability of various financial support programs aimed at reducing the impact of Covid-19 on their businesses. SMEs are also hopeful that strong adherence to standard operating procedures, more sophisticated and targeted MCOs, as well as the launch of better vaccines and medical therapies in the coming months, will help boost consumer and investor confidence.

 

The concerns within Malaysia’s SME market are mainly the world economic uncertainty (the potential recession), the cost of doing business and the weakening of the ringgit rather than political uncertainty. On the other hand, the three main factors that may have a positive impact on businesses in the next 12 months are increased business capability and efficiency especially through digitalization, improvement in Malaysia’s trading partners’ economy and market expansion opportunity due to increased number of economies opening up thanks to their better health pandemic management.

 

Having said that, no matter what industry SMEs are in, the Covid-19 pandemic has certainly brought about some business challenges. Nobody could have predicted the magnitude of the effects that Covid-19 would have on the global economy and local Malaysian businesses, but looking ahead into 2021, it’s time for local SMEs to consider how to best manage these challenges moving forward.

 

For many of these SMEs, the movement control order (MCO) has had a negative impact on their business, with over 50,000 SMEs being forced to shutter since the start of the MCO in March 2020. It is unsure what kind of impact the latest MCO 2.0 will have for SMEs, and how long the lockdown will last especially for Kuala Lumpur and Selangor. However, after the abrupt shift to working from home last year, more businesses are now better prepared for remote working and having hybrid teams.

 

Many businesses had to adjust to the “new normal” of working in the past 10 months since a pandemic was declared and MCO restrictions were put in place. However, many believe that this “new normal” is here to stay, digitisation and remote working is the future of businesses in Malaysia and it is key for SMEs to quickly pivot and reinvent themselves and their workforce to remain relevant, competitive and resilient. SMEs must adapt rather than lag behind to continually play catch up.

 

Government support, including the allocation of RM2 billion through grants and financial aid, has certainly helped to sustain cash flow and save jobs. However, it is imperative that SMEs invest in their own resilience by embracing digital solutions that will give them a stronger competitive advantage in the long run.

 

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Source:  World Bank; Bank Negara Malaysia; The Edge Markets; Focus Malaysia

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