20/2016 Will 2017 be a good year for businesses?

by Tan Thiam Hock

Saturday, 24 December 2016

BEFORE I forget, I would like to wish a Merry Christmas and a Happy New Year to all who celebrate this festive season.

I would like to wish all of you a good year ahead but I am not able to do so. While I am certain tomorrow is Christmas Day and a week later will see the turn of a new year, the future looks uncertain to me and I am just talking about the next 12 months.

As an entrepreneur, facing “uncertainty” is just a normal routine and once you are used to it, you worry less and can normally get a good night’s sleep. But when it comes to uncertainty caused by external events beyond your control, you start to worry that things might just spiral out of control into a major economic crisis that might just affect your business performance for the next 12 months. So will 2017 turn out to be a crisis year for Malaysian businesses?

Businesses thrive within a stable political environment and in today’s global inter trade economy, a stable currency is just as critical. Our last major crisis was in 1997/98 when our ringgit crashed from RM2.50 to a low of RM4.72 to a US dollar. Our whole economy came to a standstill and the economic wheels started turning only when Dr M pegged 3.8 ringgit to a US dollar. Back then, we had a Finance Minister working closely with an effective central bank to reassert some form of control over the uncertain currency devaluation.

Twenty years later, we are facing the same currency crisis. The ringgit has depreciated from RM3.48 on Jan 1, 2014 to the current RM4.48, a depreciation of 29% in two years. When uncertainty sets in and confidence is low, there is talk among bankers (of all people) now of ringgit sinking to a low of 5.0 next year. If it does, devaluation will be 44% within three years.

So my 2017 main wish list starts with a fervent hope that our finance ministers and our central bank will develop a solid strategy to arrest the devaluation crisis. My bad. Arrest is not an appropriate word nowadays. Just stop the rot will be more applicable. Just saying the ringgit will bounce back without any solid plans will cut no ice with me. How, why and when will it bounce back?

Hopefully this bounce back is not part of Vision 2020. Many businesses will be dead by then.

I am not raising my hopes yet as the very people and institutions that we depend on are dysfunctional at the moment. Headless and clueless. And powerless to make decisions.

At times like this, entrepreneurs must keep your heads and make your own contingency plans. And take decisive actions on what is within your control. Are your products and services considered as essentials or luxury? As your costs increases, how much business will you lose when you increase your selling price?

Exchange rate increases

If your imported goods costs 30% more due to exchange rates and annual price increases, and your margin is 50%, then you will have to increase your selling price by 15%. Add the 6% GST (since April 2015) and your new selling price would cost 21% more to your consumers. Can your customers who have been getting a 5% annual increment afford your higher priced products?

Inflation, if you go by my curry laksa index, has been shooting up like crazy. Assuming it was RM5 a bowl in 2014, RM5.50 in 2015 and RM6 in 2016. Then price increases would have been 10% and 9% consecutively for the last two years. And Klang Valley folks have been paying RM7 for a bowl of laksa since early 2016.

I am still scratching my head on our national statistics claim of 3%-5% annual inflation rate on a basket of goods. These statisticians should get out of their air-conditioned offices and just visit the local wet markets and experienced the agony of downgrading in purchasing habits – downgrading to cheaper seafood, meats and vegetables. Or carry a smaller basket and buy less of everything. For the same amount spent.

For mass market products and services, belt tightening by consumers will be a necessity and not as a consequence of a successful weight loss programme. Your marketing strategy will be anchored on issues of affordability and essentials. Trade down or no trade dilemma.

Diminishing margins

Higher end restaurants have suffered 20%-30% decline in revenues in 2016. I would recommend pro-active promotion deals to avoid losing another 30% in sales next year. Your landlord will most likely hold on to their contractual rental rates and your loyal staff will still ask for the annual 5% increment so fixed costs will remain the same. Only your margins and ego will diminish over time.

Just when you think there is a silver lining for exporters due to the depreciation of the ringgit, my friend could not supply to some of his overseas customers because of labour shortage problems in his manufacturing facility. He was short of 150 workers after they left for home as their contracts had ended. But he could not get replacement workers due to a complete ban on imported labour by the Home Minister announced in March 2016.

From the original intention of bringing in an additional 1.5 million foreign workers to a complete turnaround of a complete ban, I am completely puzzled by this bizarre decision-making process. Our export industries must have lost hundreds of millions in US dollar export sales since the ban. Much needed US dollars to offset our ringgit devaluation. Just wondering if our Human Resource Ministry actually exists or is it just a named box conveniently slotted into an organisational chart of cabinets?

With a highly-charged political battle brewed in 2016 and carried into 2017, entrepreneurs should not expect a politically stable environment to operate in. The reverse is to be expected as the ruling politicians divert all their attentions to self preservation and political survival. This country will be managed by civil servants, advisors and cronies. Not good.

Will this country suffer a technical recession next year? Hopefully not. Especially if the 14th General Election is held next year and expected to be the most expensive election ever. Billions of tax payers money will be circulated to the voting mass populace which can only increase local consumption which will keep our economy alive… at least for the next six months.

With so much uncertainty, peering into the crystal ball will be a useless exercise. But I can certainly predict a tough survival journey for the man in the street as high inflation kicks in. Young entrepreneurs who have not experienced the currency crisis back in 97/98 will certainly get a rude awakening when the ringgit hits 5. You are advised to standby a first aid survival kit, run for cover and keep yourself lean and fit for a journey that will be rocky and strewn with danger at all junctions and corners.

As the odds are not in your favour, there is no harm in closing your eyes and believing you are one with the Force. Maybe if you are lucky, the Force will be with you.

Have a blessed 2017. Stay safe.

Published: http://www.thestar.com.my/business/business-news/2016/12/24/will-2017-be-a-good-year-for-businesses/

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