Executive Summary of Key Findings

The new renamed survey – Malaysia’s Business and Economic Conditions Survey (M-BECS) was conducted from January to mid-March 2019, covering the period for the second half-year of 2018 (Jul-Dec 2018) and the forecast for the first half-year of 2019 (Jan-Jun 2019) has an overall response rate of 66.3% receiving 1,027 questionnaire forms.

The survey is a good barometer to gauge Malaysian Chinese business community’s assessment and expectations about domestic business and economic conditions as well as their prospects.

It covers questions to measure expectations about the prospects of economic and business performance; the main factors affecting business performance; and to gauge the implications of current issues and challenges faced by businesses.

An overview and summary of key findings of the survey are as follows:

1. Economic and business conditions weakened in 2H 2018. In tandem with a slowing economic growth to 4.7% in 2018 from 5.9% in 2017, the survey results lend credence to our assessment that domestic economic and business conditions have weakened in 2H 2018 as reflected by 48.0% of respondents indicating business conditions have deteriorated in 2H 2018. About 32.5% of respondents reported “satisfactory” business performance while 19.5% have expanded their businesses.

2. Cautious economic outlook in 1H 2019 and 2019. Faced with the softening of global growth, still considerable external headwinds amid weak domestic sentiment, businesses in Malaysia are generally cautious about the economic outlook in 1H 2019 with 50.2% of respondents were “neutral” and 37.5% were pessimistic. Only 12.3% of total respondents were optimistic. On balance, businesses are of the view that the Malaysian economy would remain challenging in 2019 as there are higher respondents (32.6%) who are ‘pessimistic’ relative to being ‘optimistic’ (15.3%).

3. Businesses’ guardedness about economic conditions will likely to improve in 2H 2019 as lower respondents (29.6% in 2H 2019 vs. 37.5% in 1H 2019) having pessimistic views while those with optimistic views improved to 17.8% from 12.3% in 1H 2019. Rising cautious optimism about the economy in 2020 (25.7% respondents “optimistic” vs. 15.3% in 2019) is probably premises on a more stable domestic policy landscape as well as the projected healthier fiscal balance sheet in 2020. The Government has set a three-year period to bring the country back on track.

4. Malaysian businesses are clearly vigilant about business prospects in 2H 2018 and in 1H 2019 as influenced by concerns about external environment (the weakening momentum in the US and China economies, uncertainty about the US-China’s trade negotiations, the Brexit impasse) as well as domestic policy transition and issues.

5. Overall, 49% of respondents were “satisfactory” and 40.3% cited “poor” about their business conditions in 2H 2018. But they are turning more cautious in 1H 2019 as higher respondents (48.7% vs 40.3% in 2H 2018) expect poor business conditions in 1H 2019.

6. Of notable observation is that cash flows conditions are expected to remain tight as indicated by 46.3% of respondents in 1H 2019 (41.3% in 2H 2018) while the number of respondents indicated “satisfactory” dropped to 46.6% from 50.0% in 2H 2018. A higher percentage of businesses (44.6%) expect debtors’ conditions to worsen in 1H 2019 from 38.2% in 2H 2018.

7. By sector, the manufacturing sector showed improvement in business prospects in 2H 2019 with a much higher (72.4%) respondents indicating between “neutral” and “optimistic” outlook than 59.4% in 1H 2019. This is followed by the services sector (71.7% in 2H 2019 vs 66.0% in 1H 2019). The construction sector recorded the highest respondents (44.3% in 1H 2019 and 40.5% in 2H 2019 respectively) with pessimistic views about business conditions, inflicted largely by the review of several mega projects as well as the consolidation of residential and non-residential projects.

8. Business operations (production, sales and raw materials) were generally in line with the business conditions.
(a) Production: While 31.3% of respondents have increased their production by between 1.0% and 5.0% to meet demand in 2H 2018, a lower number of respondents have plans to increase production (1.0-5.0%) in 1H 2019 and more respondents would cut production in 1H 2019 (31.6% vs. 30.6% in 2H 2018), suggesting still wary of demand;
(b) Sales: A majority of respondents (66.4% in 2H 2018 and 68.0% in 1H 2019) indicated that they could at least sustain their domestic sales volume. Nearly one-third of businesses expect their sales volume to decline in 1H 2019 on the back of challenging business conditions; and
(c) Raw materials: Most respondents indicated increases in the cost of local and imported raw materials (largely between 6.0% and 10.0%) respectively. Probable reasons were the cumulative impact of the ringgit’s depreciation, the change in tax regime (SST vs. GST) and indirect cascading effects from increased cost of doing business.

9. Broadly, amongst the sectors that impacted the most are the construction, real estate and manufacturing. The real estate sector was plagued by weaker buyer sentiment amid the persistent oversupply and overhang of residential properties. The weak construction output was dampened by the near completion of major projects, slower housing and commercial development projects as well as the deferment and cancellation of projects due to the Budget’s deficit and high debt constraints. Higher export sales in the manufacturing sector was somewhat offset by slower demand for the construction-related building materials.

10. Capital investment on wait-and-see mode. Businesses have become cautious about their capex spending plans. Less than half of total respondents (49.3%) have increased capital expenditure in 2H 2018, leaving 39.3% and 11.5% either have maintained or lowered their capex respectively. Going into 1H 2019, we see lower respondents (45.7% vs. 49.3% in 2H 2018) will increase capex, suggesting some cautiousness in investors’ sentiment, inflicted by concerns over domestic economic conditions and external headwinds.

11. The weaker external environment coupled with lingering operating costs (minimum wage and utility costs) and compliance costs amid the unresolved outstanding issues such as the shortage of foreign workers have dampened businesses sentiment to undertake capital investment. Compared to 2H 2018, more respondents (43.2% vs. 39.3% in 2H 2018) indicated “no change” in capex and 11.2% of businesses expect to cut capital spending in 1H 2019.

12. The top five factors cited by companies influencing their business operations and domestic business conditions are competitive pressures in domestic market; lower domestic demand; Government policies; increase in prices of raw materials; and the Ringgit’s fluctuations.

13. Government policies are deemed important to provide a stable and conducive business environment for economic growth, investment and business expansion. In this regard, the Government and policy makers can foster an environment of certainty and stability that businesses and investors crave by implement and execute right and market friendly policies with sufficient engagements and consultations with the chambers and industry players.

14. Faced with cautious economic outlook and trying demand conditions, businesses would want some flexibilities to respond to changing rules and policies. No frequent change of government policy as its inconsistencies or uncertainty about the terms and directions of policies, guidelines and business practices add a significant element of risk to making longer-term business decisions. This is especially in the case of foreign workers (FWs) management.

15. The immediate priority is to address the shortage of FWs while the Government is negotiating and regularising the new terms and conditions of FWs intake from sourced countries (Bangladesh, Nepal and Indonesia). Amongst the thorny issues hampering the negotiations are the recruiting agents; repatriation cost of illegal FWs; “Zero cost” of having Malaysian employers to bear all the recruitment/ visa/ medical fee/ air ticket costs etc. in the case of recruiting Nepalese workers.

16. The respondents were asked to provide feedback and views on a number of current issues and the impact on their business performance. The issues covered are:
(a) Reintroduction of Sales and Service Tax (SST);
(b) Goods and Services Tax (GST) and income tax refunds;
(c) The US-China trade dispute; and
(d) E-Commerce.

(a) Slightly more than half of respondents (54.6%) indicated that GST is a more preferred tax system than SST. About 42.0% revealed that the SST has adverse impact on their business and these were in the manufacturing and construction sectors.
(b) About 62.3% of total respondents would utilise between 1.0% and 10.0% of GST and income tax refunds for capital spending.
(c) 62.3% of total respondents indicated that the US-China trade dispute generally did not disrupt the supply chains while nearly three quarters of respondents indicated no impact at the moment though 23.1% foresee adverse impact in the near future if it prolongs and worsens.
(d) On the adoption of E-Commerce, 56.9% of respondents did not utilize E-Commerce platform or applications in business transactions, citing the lack of IT knowledge or IT technicians and reliability of internet speed and telecommunications infrastructure as the main two challenges constraining the limited adoption of E-Commerce amongst both users and non-users.

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