By Jason Loh
Since the No. 1 problem for small and medium enterprises (SMEs) is cash flow, if it continues to be constricted despite government assistance against the backdrop of a gloomy outlook for the economy, then they will have problems not only in retaining workers but also in servicing both their current and new debts.
The government is already trying its best to manage the current SME crisis – which is saving businesses from closure and also thereby saving jobs – either by directly injecting funds or providing them as loans to enable SMEs, especially the small/micro-sized businesses and the mid-tier companies, to survive and stay afloat.
So, the first question is this: Have this been successful in slaying the unemployment devil?
If not, the second question follows: Are we then not in danger of “sleepwalking” into the deep blue sea – this time perhaps in the form of a “loans crisis” (non-performing loans or NPLs) by SMEs?
The first implication would logically be, therefore, that SMEs might need more direct fiscal injection in order to resolve the cash flow problem.
In fact, Calvin Cheng of the Institute of Strategic and International Studies (ISIS) has called for grants, instead of loans, to provide a stronger buffer for vulnerable SMEs to avoid insolvency.
Piling loans upon loans on SMEs could, paradoxically, exacerbate their cash flow problem!
With the Malaysian Institute of Economic Research (MIER) forecasting unemployment levels will still hit 9.2% by year-end, which translates into around 1.5 million workers under the worst-case scenario, even with Prihatin and Prihatin Plus, the argument for more direct fiscal injection should gain traction. The Malaysian Employers’ Federation (MEF) has predicted that unemployment could even reach 13%!
Normally, unemployment is correlated with consumer spending. However, consumer sentiment was resilient and robust during the peak of the Covid-19 season for many Asian countries, according to the latest McKinsey survey. This is confirmed by a Boston Consulting Group’s (BCG) Centre for Consumer Insight report which highlighted that 53% of Malaysians surveyed believe the nation’s economy will improve in the next 12 months.
But typically, the higher the unemployment, the lower the consumer spending. This is so even if businesses survive by retrenching. Higher unemployment affects aggregate demand in the economy. Shrinking aggregate demand bites back at surviving businesses and so the vicious cycle goes. No demand, no supply.
So, even with buoyant consumer spending levels, this is simply not sustainable in the medium run due to rising unemployment.
Under such conditions, the chances of default would certainly increase.
This means that not only are we in danger of not defusing the unemployment time-bomb, we are also in danger of being confronted with the bad loans time-bomb in the near future.
For now, many SMEs have applied for the Wage Subsidy Programme and Employment Retention Programme to help them stave off retrenchment. Some have also taken advantage of the credit lines facilities to help ease their cash flow.
As of May 2020, banks have approved about RM3 bil worth of funds to help support 6,840 SMEs. The bulk of the amount was from the Special Relief Facility (SRF) provided by Bank Negara.
The SRF allows SMEs to apply for loans up to RM1 mil with a 3.5% interest rate. Eighty percent of the amount is guaranteed by the government through the Credit Guarantee Corporation.
Of the Micro-Credit Loan Scheme offered at zero percent interest rate, RM132 mil had been approved by Bank Simpanan Nasional (BSN) and TEKUN Nasional. BSN approved RM90 mil for 2,000 micro SMEs, while TEKUN Nasional approved RM42 mil for 5,000 micro SMEs.
Tan Sri Yong Poh Kon, in his capacity as Honorary Adviser for the Malaysian Consortium of Mid-Tier Companies, has calculated that an additional RM15 bil for six months for the Wage Subsidy Programme is needed – which adds to only a meagre 1% and hence amounting to 7.1% of GDP.
Even then, for those who are servicing their current loans, the risk of default or delinquency rate might potentially spike after the end of the six-month moratorium period (for bank loans), according to Dr Yeah Kim Leng, professor of economics at Sunway University Business School.
He is quoted to have said that “defaults are likely to escalate after the moratorium period, especially if the over-leveraged companies or individuals are unable to continue servicing their debts due to continuing business losses and layoffs”.
Nonetheless, Dr Yeah also added that a stress test by Bank Negara Malaysia has indicated that the banking system can absorb such losses.
Now, while our banks’ impairment ratio – the level of bad debts on the balance sheet – is at safe and sound levels, this could still potentially change in the medium term.
The problem is, of course, from the SMEs and not the banks. But the banks will also have to suffer NPLs when the defaults occur.
Offering credit to SMEs which are already in debt is, therefore, akin to SMEs taking on new loans in order to pay off pre-existing ones, which in turn is like kicking the can into the long grass, ie delaying the inevitable.
The final reckoning will be when the impact from the real economy catches up with the financial system – “reverse transmission” – that might even drag the economy as a whole further downwards.
This doom and gloom scenario of SMEs defaulting on loans which will reverberate throughout the economy might not even materialise. It’s all still “theoretical” – at least at this stage.
Still, the bottom line is that our SMEs need more help than loans. Nowhere is this clearer than for the government to look into increasing its direct fiscal injection for SMEs. – June 2, 2020
Jason Loh Seong Wei is head of Social, Law and Human Rights at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.f
