RAM index: Favourable business environment expected

PETALING JAYA: A more favourable business environment in the year ahead is expected by Malaysian firms despite challenges that could dampen their earnings.

According to the latest findings of RAM Holdings Bhd’s Business Confidence Index, Malaysian firms could face stiff competition that would weigh on their margins, besides the problem of rising costs.

“Malaysian firms expect a more favourable business outlook in the year ahead.

“Nonetheless, this also entails some challenges,” RAM said in a press release.

“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 (that is, the Employment Insurance Scheme, or EIS), and a volatile ringgit,” it explained.

For the second and third quarters of 2018, business sentiment in Malaysia was found to be positive, said RAM.

“The Corporate and SME indices improved to a respective 56.8 and 52.5, underpinned by increasingly more broad-based positive sentiment across all the surveyed aspects,”the ratings agency said.

The hiring and turnover aspects of the corporate and SME indices showed the most improvement. The hiring sub-indice rose two points and 1.2 points to 60.6 and 57.7, respectively.

RAM said this improvement indicates that the current employment growth momentum will likely continue over 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-indice grew 2.6 points for corporate and 0.5 points for SMEs.

RAM noted that the SME turnover sub-indice was at 50.7, marginally above the neutral 50-point mark, but improved from a negative reading two surveys ago.

“Much of the improvement in turnover sentiment for both Corporates and SMEs are attributable to domestic-oriented firms, suggesting that the economic recovery is increasingly being felt by domestic enterprises,” said RAM.

It added that it signals the start of more broad-based economic growth while the boost from the resilient external demand behind Malaysia’s growth is filtering down to the local economy.

The index also shows that about 10.8 % and 9% of surveyed domestic-oriented corporates and SMES, respectively, reported higher export contributions to total sales.

This compares to an average of 3.9% and 5% of respondents in the last three surveys.

The retail sector, which has been the least optimistic sector over the last five surveys, showed the most progress in business confidence for the coming two quarters with its overall index rising 1.5 points to 52.2.

“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.”

RAM suggests that there could be a recovery in consumer spending, expecially on discretionary items.

Labour market conditions and bullish hiring intentions across the sector could also indicate a healthier retail landscape.