Latest indices underpinned by increasingly broad-based business confidence

KUCHING: The second quarter ( 2Q)- 3Q 2018 RAM Business Confidence Index ( RAM BCI) - the second survey this year – remained positive, suggesting that Malaysia’s economic momentum remains on track.

The corporate and small and medium enterprise (SME) indices improved to a respective 56.8 and 52.5, underpinned by increasingly more broad-based positive sentiment across all the surveyed aspects.

For both the corporate and SME indices, hiring and turnover were the two aspects that showed the most improvement. The hiring sub-indices rose for the second consecutive survey, by 2.0 points to 60.6 for Corporates and 1.2 points to 57.7 for SMEs.

This indicates that the current employment growth momentum will likely continue through the next six months. Analysed in tandem with firms’ sustained bullishness on capital investment and business expansion, this trend suggests that firms will remain in expansionary mode to capitalise on positive business prospects.

The turnover sub-indices also posted notable improvement for 2Q-3Q 2018 (corporate: up 2.6 points; SME: up 0.5 points). In particular, SME’s turnover sub-index (at 50.7), although just marginally above the neutral point of 50, has risen from the negative reading of two surveys ago.

Much of the improvement in turnover sentiment for both corporates and SMEs are attributable to domestic-oriented firms,suggestingthattheeconomic recovery is increasingly being felt by domestic enterprises.

This represents positive signs of the start of a more broad-based economic growth. Notably, the boost from the resilient external demand behind Malaysia’s growth is filtering down to the local economy.

The back-to-back improvement in business sentiment among domestic-oriented firms can also be due to more firms benefitting from export sales. Approximately 10.8 per cent and nine per cent of domestic-oriented corporates and SMEs, respectively, surveyed in the latest RAM BCI reported higher export contributions to total sales, compared to an average of just 3.9 per cent and five per cent of respondents in the last three surveys.

The overall index for the retail sector showed the strongest improvement among SMEs for 2Q-3Q 2018 (up 1.5 points to 52.2), effectively snapping its five-survey streak as the least optimistic sector. While the sector’s turnover and profitability sub- indices remained below the 50- point threshold, the second consecutive increase to a respective 49.1 and 48.7 is a welcome improvement.

Barring any unforeseen circumstances, this signals that sluggish consumer spending - especially on discretionary items that had plagued the sector in the past - could soon be on the cusp of a recovery. Better labour market conditions and bullish hiring intentions across all sectors captured by the RAM BCI also indicate a potentially healthier retail landscape.

To conclude, Malaysian firms expect a more favourable business outlook in the year ahead. Nonetheless, this also entails some challenges. Stronger demand encourages more supply but introduces keener competition, which may dampen profit margins, especially for SMEs that lack scale when competing against larger firms.

Firms also face lingering cost concerns, especially following the hike in gas tariffs, more expensive labour, regulatory- induced costs such as the Employment Insurance Scheme or EIS), and a volatile ringgit.