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Government support to SMEs – is it enough?

Written by Laurence Todd, Research Director of IDEAS

The focus of the government’s stimulus measures has shifted decisively in recent days, in response to the escalation in the Covid-19 crisis. Whereas a few weeks ago, we were discussing whether the measures announced by Dr Mahathir would help to stimulate the tourism industry facing falling numbers of visitors, now we are discussing whether the measures in place are enough to help those falling out of work continue to access the goods and services they need. This shift – from stimulating to protecting – has been made necessary by the escalation of the government’s measures to control the virus through the Movement Restriction Order (MRO).

This situation is unprecedented in so many ways. We are facing a globally co-ordinated, deliberate shutting down of economic activity – an induced slowdown. This is being done to stave off a worse crisis: an overwhelming pressure on health services. The trade offs here are daunting. Can we endure the slowing down of economic activity long enough to ‘flatten the curve’ of infection? Answering this question brings us back to the nature of the government’s stimulus. It is clear that economic activity will decline during this period, so we are past the phase of simply trying to stimulate private consumption to maintain growth. Now we need to focus on putting place adequate protections to ensure that individuals and businesses can endure the induced slowdown long enough to break the chain of infection. Businesses that struggle during this period are not doing so due to lack of competitiveness but because of artificial constraints on activity imposed – for good reason – by the government. This creates an extraordinary mandate for the government to support them during this time. Chris Choong at Khazanah Research Institute has written very clearly on the  measures announced to support individuals, and I want to make some comments on the recent measures for SMEs.

Yesterday the government announced MYR3.3bn of support for SMEs. The first question is what is the nature of the support and who is it for. At this point I think it is helpful to recognise that businesses will – very broadly speaking – fall into one of two camps. Some companies will be able to adapt to the restricted conditions, particularly if their products and services can be delivered remotely – we can all expect Zoom subscriptions to go through the roof. These companies can adapt to the current situation, maybe even expand and take on more employees. Other companies will be fundamentally restricted in their ability to operate – their business models rendered inoperable by the restrictions. These businesses are inevitably going to enter a period of lower activity, a state of “hibernation” from which they can hopefully rebound once the measures are lifted. So how does the MYR3.3bn break down between these two groups? Well, there’s a few hundred million of new funding of loans available for investment. It may be that some “hibernators” have the space to invest during this downtime, but it is likely that many – particularly microenterprises – will quickly be cash strapped and not thinking about investment. So these measures should be targeted at the “adapters”, to encourage them to pick up some of the slack in the economy. There’s MYR1 billion specifically for agri-food businesses to increase food production – so this is intended precisely to boost the “adapters” in that sector. That leaves the RM2 billion Special Assistance Facility, designed to ease short term cash flow problems. This, I suspect, is what the “hibernators” truly need and what government economic policy will increasingly need to focus on.

So, is RM2 billion enough to keep our SMEs afloat during this period? Well, here we quickly realise that size matters when talking about SMEs. Let’s do some rough calculations. There are over 900,000 SMEs in Malaysia – 920,624 in the latest Economic Census in 2016. So probably close to one million today. Over 75% of these SMEs are micro businesses, meaning they employ fewer than 5 people and have a sales turnover of less than RM300,000 per year. With some very quick maths and simplifying assumptions, I calculate that this means if the Special Assistance Facility is just targeted at micro enterprises it could cover about 25% of turnover for one month for nearly half of Malaysia’s microenterprises. Hopefully not that many will need it and some that need it might need more, but having the firepower to help nearly half of our micros for the next month is a very strong start. However, if we assume that small and medium companies are also included, the calculations move significantly. Medium enterprises in manufacturing can employ up to 200 people with sales turnover up to RM50 million. If we assume the RM2 billion needs to cover all SMEs, then I calculate it can cover 25% of sales turnover for one month for only 8% of firms – this is still nearly 1 in 10, but clearly it could run out more quickly. The point here is to show that we need to be targeted in our policy response. We can do more with less if we focus on supporting micro entrepreneurs, but if we extend that to medium size businesses the well could quickly run dry, and ultimately, we are probably going to need to do both.

The next question is how struggling businesses will access this facility. The Ministry of Finance has said that the financial support will be channelled through financial institutions, comprising commercial banks, Islamic banks and development financial institutions regulated by BNM. This is likely to be ok for the larger medium sized companies who will already have relationships with these institutions. But getting support to micro businesses is not so straightforward. The bulk of financing for micro businesses comes from friends, families and personal savings. Only 25% of micro firms have experience getting credit from banks, compared to 86% for medium sized firms. The measures are also likely to be gated behind online systems, which makes sense to manage the flow of requests, but with digital adoption sorely lagging among our micro firms, this may mean they might miss the safety net altogether. We may need to quickly develop new mechanisms to distribute assistance.

So, it is a good sign that government policy has shifted decisively towards putting a safety net in place to help those SMEs who will bear the brunt of this induced-economic slow down. But we also need to ask some tough questions and to clarify our strategy. We need to distinguish between those firms that can adapt to the situation, and those firms who will inevitably face a decline in activity and cash flow problems in the short term. We need to distinguish between micro, small and medium firms as their needs will be different and so too will be the demands they place on the government’s coffers. Third, we need to ensure we have the delivery mechanisms in place to ensure that the assistance can get to those who need it, or all the money in the world won’t make the difference. Then, if we can do all that, we probably have to face up to the fact that RM2 billion won’t last that long. This brings us back to the overarching trade off – how long can SMEs endure the induced slow down and how far are taxpayers able to help them do so.

2020-03-21T10:29:06+08:00 21st March 2020|Opinion|Comments Off on Government support to SMEs – is it enough?