On the eve of Malaysia Day, I was delighted to share a few drinks and cigars with my two elderly sifus, Peter Khoo and TK Teo. Khoo, an accounting and tax practitioner and Teo, an experienced banker and corporate personality, have such great stories to tell with much wisdom imparted from their past experiences.
But our discussion turned sombre when I asked them how bad has this pandemic-driven recession affected Malaysian SMEs, as compared with other recessions since 1987.
Both say that the SMEs are facing the toughest challenges ever seen before.
Khoo reckons some 30% of Malaysian SMEs have closed down in the last 18 months. Teo feels that more SMEs will close down come January 2022 when the bank moratorium ends.
My hairstylist who used to have a saloon in Kota Damansara told me that more than half of the 40 over hair salons in his area have closed down in the last 18 months. Many shopping malls across the country have seen retail and F&B stores close. Not forgetting the closures of so many hotels and all tourism businesses. The list is endless. The damage is extensive.
The many lockdowns and strict SOPs have ruined many businesses. As the losses mounted, cash flow depleted super fast, defaults on bank loans reprieved by two moratoriums, savings are all used up and there is no light at the end of the tunnel for any recovery in business. Until now.
Luckily for Malaysia, our vaccination programme has been accelerated and in three weeks, 90% of our adult population would be fully vaccinated. The adult population is the working population. This has enabled the government to open up the economy gradually and come October, hopefully all sectors will be reopened and we hope that it includes allowing interstate travelling.
How can the government help the SMEs? I had asked Teo this question before we left for home.
The following day, Teo asked if I remembered about the Export Credit Refinancing (ECR) scheme which was introduced by the government after the 1987 major recession.
Of course I remembered. In the late 1980s, I was managing a rubber glove factory and had used the ECR facilities to the maximum. Upon receiving a purchase order (PO) from my customers, I could utilise up to 80% of the PO value to issue letters of credit to my latex supplier, order packaging materials and pay for the gas bills.
Upon completion of the order, the money received is first paid to the bank and the balance money is used to pay salaries. Manufacturers could borrow upfront based on a firm order so that production could proceed.
Financing cost was at 4% compared to the standard 8%-10% commercial rate of borrowing. It was a Bank Negara initiative, all ECR loans and facilities extended by commercial banks were guaranteed by Credit Guarantee Corporation (CGC), owned by Bank Negara and Malaysian banks.
Teo explains more: “As we know, SMEs are the worst hit sector during this pandemic. Most of them have no more working capital even if there is new demand for their products or services.
“Most of their existing loans have now turned into non-performing loans (NPL). So they have little chance of getting banks to extend additional facilities to them. Therefore, Bank Negara can introduce a similar funding scheme that can cater to SMEs that have contracts or orders in hand, but need fresh working capital.
“These funds can be guaranteed by CGC and also with the condition that part of the new business proceeds must be used to settle the existing NPL.”
Teo’s idea is practical and offers an amicable solution to all parties.
SMEs will get fresh loans and cash flow to proceed with their operations to fulfil orders. Banks are able to reduce the NPL impact without taking on more risks.
The government controls a quantitative easing measure that is directed at productive activities that contributes towards faster growth of our gross domestic product.
I would like to expand on Teo’s idea and suggest the following:
Set up a RM100bil SME revival fund. Allocate an amount to the banks based on their respective loan size to the SME sector. CGC can guarantee up to 80% of the new loans extended by the banks to existing SME customers.
Set the interest charged for these loans to not more than 3%. With overnight policy rate at 1.75%, there are sufficient margins for the banks to implement this scheme profitably.
For export business, reintroduce the ECR scheme. For domestic business with orders or contracts in hand, a similar domestic credit refinancing (DCR) scheme can be implemented.
The total amount of financing should be about two to three months of rolling future sales. Assuming it makes RM500,000 monthly sales, based on 80% financing, a RM1.2mil DCR facility would be sufficient.
For businesses that depend on future orders like F&B and services, a one-off revival loan can be implemented. Assuming the F&B outlet can generate RM100,000 monthly sales, then an upfront RM100,000 loan repayable over three years can be implemented. This RM100,000 loan will be sufficient to kick-start the business
Bank Negara should consult the various trade associations and banks to ascertain their needs before designing the SOP’s for the SME revival fund.
In addition, Bank Negara should open a channel for the unrepresented SMEs to start a dialogue to understand their needs.
The ECR and DCR schemes can be implemented quickly and should be implemented before the moratorium expires by the end of this year.
With the economy opening up, let us hope that our government will not resort to further lockdowns because the country will plunge into an economic abyss and never recover. We also need the government to ensure proper public health policies go hand in hand with economic activities.
The Health Minister has started the vaccination of children from the ages of 12-17 years, but the speed of vaccination will depend on the supply of Pfizer vaccines, which is again delayed.
The Education Minister has wisely delayed the starting of the school term and correctly said it should coincide with the vaccination progress of children.
Some countries like Singapore have started booster shots of vaccines for the elderly and for cancer patients so I am sure our Health Minister will look into this urgent matter, again subject to the delivery of vaccines.
Our Senior Minister for Security has announced that the 181 SOPs will be reduced to just 10 ‘simple to understand’ SOPs.
The whole nation will rejoice when the new SOPs are announced. It should be based on vaccination status, public health considerations of wearing masks, sanitisation, social distancing and crowd control.
Further considerations will be on self testing, home quarantines and contact tracing. Generalise the instructions for businesses and citizens to follow and make SOPs simple so that it will not be misinterpreted by local enforcement officers.
Businesses should not be subjected to International Trade and Industry Ministry approvals anymore.
We should not burden the police with applications for interstate travels. The civil service must revert back to pre-Covid efficiency levels. It is unproductive to have to make a booking online for an appointment to submit a document and frustrating to see all slots have been fully booked for the next two weeks.
What used to be a simple task of going to a public service department, collect a waiting number and conducting a simple transaction on the same day, must resume immediately.
I have never seen any government departments refusing to collect taxes or stamp duties before until this pandemic.
The land office is closed, the public have not been able to get road tax since March and the Inland Revenue Department is refusing to collect cheque payments at their counters. Funnily enough, our Finance Minister was lamenting about the low collection of tax revenue.
Lastly, the plantation and the manufacturing sectors are screaming for foreign workers to be allowed entry.
Since the pandemic started, we have had net outflow of foreign workers returning home upon completion of their contracts as no inflows are allowed. Working mothers are also in search of domestic helpers since their previous helpers have left for home.
With the economy opening up quickly, we need to allow entry of new foreign workers and domestic helpers. It is a major revenue for the Home Ministry as workers levy and fees run into hundreds of million a year.
Managing this recovery will require all ministries and our civil service to work together, coordinate better and communicate with one voice. And do listen carefully to the voice of desperate SMEs and to the voice of frustrated citizens as GE15 is only two years away.