9/2020 – Cashflow and monthly operating costs are key

After watching Prime Minister Tan Sri Muhyiddin Yassin’s announcement on the enhanced stimulus package for SMEs, my various chat groups came alive with all kinds of comments and opinions. In particular, one chat group which comprises experienced retired senior bankers, entrepreneurs and senior business journalists (all about the same age of 60 and above) stood out for its wisdom and sharp foresight.

When asked about potential SME casualties in this economic crisis, a senior banker commented, “TH… I went through four deep recessions/business cycles, ie, 1987,1997,2007/8, and now 2019/20. Same like you, and no wiser than my friends in this group.

“My gut feeling is that there will be more casualties this time around because the pandemic is world-wide. But like all recessions, the economy will turn around. It will not likely be a V-shaped recovery. We all have to tighten our belts, cut losses, and make sure we survive to enjoy the recovery.”

He is correct, as this recession is like no other. It is the first time that almost all economic activities have stopped in all the major countries in the world at the same time. There is a supply shock as the supply chain has been completely disrupted to a standstill.

There is demand shock as sales of most industries have fallen off the cliff to almost zero during lockdowns, and there is capital market shock as global stock markets crash.

Predicting the timing of the recovery is extremely difficult as we now have to deal with a virus pandemic with no solution in sight. Yes, a complete lockdown can flatten the curve but the risk of a re-occurrence of a new wave of infections is very high when the movement control order (MCO) is lifted. Economic activities have to resume, so we will have to practise some form of restricted MCO for the next six months.

And this affects business.

Sales will continue to be very soft as consumption drops due to lower consumer confidence, higher unemployment and reduced personal income, as widespread paycuts are implemented. As in most recessions, not all businesses will do badly. From experience, consumers tend to trade down, ie, purchase lower-priced alternatives to sustain their lifestyle. Hawker stalls will continue to do well, while higher-priced restaurants will suffer.

The logical conclusion for SME owners is to focus on surviving the next six months. Once the moratorium on your loans ends in October, will you still be standing with the ability to start repaying them? Will you have sufficient cash flow to participate in the economic recovery which will probably start in 2021?

Your survival strategy till October will have to focus on two key issues – cash flow and monthly operating costs.

Managing cash flow > Sufficient banking facilities – Since all your loans have been placed under a moratorium (meaning that you won’t need to repay them for the next six months) by your bank, you will need to check if the balance amount of banking facilities will allow you to trade normally.

If not, quickly apply to your bank for additional trading facilities. If you have spare cash, it might be wise to start paying down your loan when you can and not wait till the end of October.

  • Cash reserves – You will need to cover March and April losses from your cash reserves. Reduce your losses for the next five months through aggressive cost-cutting. Most businesses will face delayed collections so cash reserves, if available, will be most useful to cover cash-flow deficits.
  • Wage subsidy – Expect delays in your claims as the government will not be able to cope with the massive influx of applications. If approved, expect delayed payments of at least a month in your cash-flow planning. The wage subsidy is only for three months but you need to survive the next six months. So, plan accordingly.
  • Corporate tax – For companies that will definitely declare a loss in 2020, my advice is to write in to the Inland Revenue Board informing them that you will declare zero profits for the financial year-end 2020, and suspend all tax payments for future projected profits. There is no point loaning the money back to the government when you need it more to survive.
  • Deferred EPF payments – Just like bank loans, EPF payments have been deferred for six months when you will have to restructure your payments with the agreement of the EPF. Do not consider this as savings. It goes into accounts payable, interest-free of course.
  • Rental subsidy – The announced tax deduction for rental rebates of 30% for three months from April to June will be effective in encouraging private-sector landlords to implement only if double deduction is allowed. In times of need, business partners should help one another. This is how the Chinese business community has been built over the last 100 years in Malaysia.
  • Moratorium – This is probably the best Bank Negara strategy to help preserve cash-flow liquidity for businesses to continue trading. By allowing the banking system to prevent classifying non-payments after three months as non-performing loans (NPLs), businesses can breathe and continue trading for another six months. Individuals too have more cash in hand to offset the paycuts that will definitely happen. By end-October, Bank Negara must allow another restructuring of existing loans by another six months to businesses who will benefit from the economic recovery.

Reduce monthly operating expenses. The survival of your company depends on the amount of cash reserves you have to fund losses in March and April and also losses to be incurred from May to October. So, it is imperative that losses are kept to a minimum in the next five months.

Losses are calculated after deducting expenses from net sales. Net sales is gross sales less cost of sales. So, if net sales are down, expenses must come down proportionately, which in this case might not be possible for companies which suffer a big drop in sales.

While your sales revenue is dependent on external factors which are beyond your control, to a major extent, you are in control of your own expenses. For most service companies, payroll forms the biggest portion of the monthly expense. This is normally followed by rental or in some companies, advertising and promotion.

  • Rental – At the maximum, expect your landlord to give you a rebate of 30% from April to June. This means that you can factor into your expenses a reduction of 15% in rental payments for the next six months.
  • Advertising and promotion – It has been proven in the last recession that companies that continue advertising and conducting promotional activities will sell more than their competitors who stop completely. You are advised to work with your media suppliers to get more bang for the same budget. I am sure the media companies will support you, as they too need sales and have excess inventory to give away.
  • Office expenses, allowances and claims – Cut all the unnecessary frills that you can ill-afford. Not much but every penny counts. Spend some on healthcare, though, to look after the team.
  • Wages – I have stopped comparing with the Singapore government’s wage subsidy plan because our government does not have sufficient reserves.

With the latest proposed enhanced wage subsidy, it looks like SME owners must take matters into their own hands. Some companies will enjoy reasonable support of up to 30% subsidy on the wage expense, while some will only enjoy 5% to 10%.

Do remember that this is only for three months. Why the government is not exempting EPF payments for six months is beyond my understanding. This will only translate to a higher paycut across the board.

I have an investee company where the senior management has given the board of directors a revised sales forecast, with sales revenue dropping by 20% against the 2020 budget. But no corresponding reduction in expenses was given.

I have replied that this sales forecast might not be achievable and that we should start looking at reducing our expenses, mainly the payroll, which is a massive portion of it.

I would recommend a minimum 20% paycut across the board, freezing all intakes, probably retrenching a few positions deemed not necessary and linking the paycut to sales. If the sales for May to October drop by more than 50%, then the paycut will be more severe like 30%-40% for those who earn above RM4,000. However, if sales recover to its original budget then the salary will revert to its original amount.

Different companies will have to tailor different strategies, depending on the sales performance of the company up to October. For companies where payroll forms the bulk of expenses, detailed human resource requirements must be considered.

Where possible, the fixed salary cost should be changed to a variable cost, as a percentage of sales. This will help minimise losses to a great degree and at the same time save jobs and keep your key employees employed.

Some form of right-sizing is required now. Where possible, eliminate jobs to reduce 10% of your current payroll. Then undertake a paycut of 20% to make total savings of 30%. Then, submit for wage subsidies to the government if your company qualifies, which will probably save you another 5% to 10% of your existing payroll. With immediate savings of 35% to 40% from payroll deduction, you can take your chances with the remaining five months, of which April is already a complete loss for you.

Then my entrepreneur friend asked, “What if the employee does not accept a paycut?”. My answer: “Nobody can stop this employee from leaving the company on his own free will.”

At this moment of truth, SME owners’ only objective is to save the company from going bust. Minimise the losses so that you can stretch your reserves till October.

At the next moment of truth in October, SME owners will have to decide whether to continue or close their business. Don’t forget that you still have deferred EPF payments and the loans with interest to pay off. You can avoid bankruptcy if your business is still alive in October 2020.

From one battle-scarred entrepreneur to all the young entrepreneurs and SME owners out there: “Stay alive today to fight the next battle tomorrow. And you will win again.”

8/2020 – Resumption of economic activity: Clear guidelines needed

We have just gotten news that the government is forming a special Cabinet committee to bolster its stimulus package and strike a balance between economic priorities and effective enforcement of the movement control order (MCO) due to the Covid-19 pandemic.

Firstly, there is not much to the economic stimulus package. It should perhaps be renamed as a survival package. How the SMEs are going to get through this extremely difficult time and how the people are going to judge the performance of this government in the next general election remains to be seen.

The government has made the right decision in allowing the director-general of the Health Ministry to manage the pandemic without interference from the politicians. In times of crisis, the nation needs a calm and level-headed leader to come forth and save the situation.

Our ministers should refrain from putting their foot in their mouth because this pandemic has reset the ‘new’ normal. In this crisis, there is no place for a lack of intellectual capacity, populist policies (that might counter the MCO’s efforts) or cheap publicity stunts.

On a side note, though, I thought the “Doraemon” advice was a good distraction for a nation under quarantine. It did bring a smile to our faces.

This special Cabinet committee must include the private sector from the supply chain side and set out clear guidelines for the resumption of economic activity – both during the MCO (essential services) and post-MCO periods.

As a guideline, it would do us well to refer to Singapore, South Korea and Japan to pick out their best practices. It is never too late to learn from other people’s experience.

Here, I would like to highlight a couple of real stories that have played out in the first two weeks of the MCO.

First on the list is the supply chain disruption for essential services. When the MCO was announced, the list of essential services that was allowed to operate was also announced. Many factories had to apply to the International Trade and Industry Ministry or Miti for permission to operate. It was announced that they had to submit their forms with the condition that they reduced their workforce by half in view of the safety directive from the Health Ministry.

Many factories did not get approval from Miti in the first week, so they stayed closed. In the meantime, the Human Resource Minister came up with the statement that all salaries must be paid during the MCO period.

Many workers took advantage of this statement, packed their bags and left for their hometowns. Now that the MCO has been extended for another two weeks, employers are facing a big problem in asking them to return to work. Can employers not pay the workers because they refuse to work then?

A factory producing the much-needed hand sanitisers had supply chain problems because its suppliers of alcohol, bottles and cartons were not allowed to operate in the first week. Some started operating in the second week, but the carton factory couldn’t start because the workers refused to come back to work. The alcohol factory simply refused to start operations for whatever reason. Production has since slowed down to half the normal capacity as the supply chain has been disrupted.

The same factory had another problem as it had received a big purchase order of hand sanitisers in February from overseas. It was already producing and shipping the goods in March when the government came up with the directive to ban the export of essential products. It checked with Customs on whether it could ship its products out but was informed that approval was necessary from Miti. However, nobody could be contacted on this.

Then, due to the congestion of containers stuck at the ports (for whatever reason), the Transport Minister got involved. Importers were crying foul that their import shipments of much-needed face masks and other essentials had not been cleared by the port authorities.

The Transport Minister also announced that export orders should be fulfilled by Malaysian factories after the Federation of Malaysian Manufacturers or FMM sent out an SOS.

However, the latest news from FMM is that this is not happening due to stringent action undertaken by the relevant enforcement agencies. It must be the Customs department and port authorities seeking Miti’s approval. So, who is in charge of approving the export of essential products here?

To add to the chaotic situation, local “essential” manufacturers that require local logistics companies to transport their goods must get approval from the Domestic Trade and Consumer Affairs Ministry. Miti must have been swamped with too many requests and as such, refused to accept any new applications to operate during the MCO after March 24. What if the MCO is extended for another two weeks till April 28? This would be a mind-boggling problem, wouldn’t it?

To date, according to our Health Ministry director-general, our pandemic curve is flattening, which is a good sign that social distancing does indeed work. We are hoping that the MCO till April 14 would be sufficient to flatten the curve of the second wave. If necessary, the MCO might be extended till April 28.

That would be fine with most people, as long as normal economic activity is partially resumed and the supply chain – especially for the production, transportation and sale of essential products – is up and running.

It is the post-MCO period that this Cabinet committee must think through thoroughly. It would be wise to get the advice of supply chain experts and coordinate thoroughly with all the ministries. However, as the health of the people takes priority, the Health Ministry’s directives would take precedence over all other ministries. The second-most important thing would be the seamless resumption of economic activity with strict safety practices in place.

This Cabinet committee could learn a thing or two from its Singaporean counterparts on this. First, practising social distancing in public places and at work is a must. Restaurants must reduce customer capacity by half and advocate a space of one metre between them. Offices ought to have flexible lunch hours from 11.30am to 2.30pm, which would mean sending out staff in three batches. This would also complement the seating capacity of restaurants.

All religious gatherings should be banned until the threat of the third wave is negligible as decided by the Health Ministry. As a matter of fact, any gathering of 10 people or more should be strictly prohibited. If we can get through June without any sign of the third wave, then we will be in good shape.

We should continue with strict personal hygiene practices both at home and at work. This would be to avoid another virus pandemic in the future.

Next, all economic activity should be resumed. The supply and demand equation will sort out the sharp fall in consumption. Let the SMEs adjust to the new challenges.

Most of all, the government must ensure the safety of its citizens during this pandemic and economic disaster, and assist the real economic producers by providing a seamless supply chain solution thereafter. As we were operating just fine before the pandemic, let things go back to the way they were before. The more the various ministries jump in to regulate, the messier it would be.

And for the time being, just let the health director-general speak. He seems to be doing just fine.

Published: https://www.thestar.com.my/business/business-news/2020/04/03/resumption-of-economic-activity-clear-guidelines-needed

7/2020 – Keep calm, help is on the way

My friend, who is the chief risk officer of a major international bank in Singapore texted this message in our chat group: “Dear bros, preparing for a global recession.

That’s best case scenario assuming pandemic contained by summer. Governments world over doing whatever it takes to preserve productive capacity for resumption of normal economic activities.”

Singapore has called on its reserves to spend 10% of its GDP like most European countries and now the United States to preserve productive capacity which means keeping workers employed, supporting livelihoods and stabilising businesses.

I have just texted: “Friend – not all governments preserve productive capacity. Certainly not Malaysia after the announcement of the economic stimulus programme by our PM.”

You can imagine my disappointment after listening to our PM last Friday. In my honest opinion, it felt like a stimulus programme designed by politicians rather than economists. Formulated by a back-door government trying to please its voter base and asking for acceptance.

Let us analyse the Resilience Budget by the Singapore government.

Their Job Support Scheme pays 25% of monthly wages for every local worker in employment capped at S$4,600 a month for nine months until December 2020. Enhanced Jobs Support scheme for food and beverages firms at 50% of monthly wages with the same cap of S$4,600. For aviation, hotels, travel agencies, tourist attractions, and MICE venue operators – a whopping 75% monthly wage offsets with same cap for nine whole months!

All firms qualify for the wage rebates if they do not retrench and they must pay full salaries and CPF. Employers can now forecast their annual 2020 profit and loss account based on an expected decrease in sales revenue. How much losses can our company bear? What is our projected cash flow deficit? Should we borrow more money to sustain the business? The entrepreneurs and business owners will have to decide.

Why nine months? The pandemic has now spread to over 190 countries in the world and even if Singapore is able to control Covid-19 by June, the economic recovery will be slow due to the global recession that has already set in. Singapore needs to preserve its productive capacity which includes the workforce for the gradual resumption of economic activities in global trade.

The appropriately named “Resilience Budget” is aimed at building resilience, supporting workers and protecting livelihoods. Stabilise businesses and preserving jobs. Providing welfare to its citizens. Singapore allocated S$15bil for salary subsidies and S$4.6bil for welfare payments. All direct cash payments.

In comparison, Malaysia has allocated salary subsidies of RM5.9bil and welfare payments of about RM12bil. I have no arguments against the welfare payments to the B40 group as they have insufficient savings to survive this trying period.

If Malaysia wants to prevent mass bankruptcies and mass unemployment in the SME sector, then we need to do more as the current direct cash injection falls way short. Granted our Government has no reserves to fall back on unlike Singapore, it does not mean we are not able to come up with creative solutions to solve our problems.

We know that our SME businesses will need to survive for the next six months with minimum losses. As such we must have solutions to help them reduce monthly operating cost with the view that there will be a minimum drop of 50% in sales revenue. Basic accounting rules in profit and loss (P&L) – expenses incurred like EPF, bank interests must be accounted for in the monthly accounts.

Deferred payment of EPF, interests, loans is part of cash flow computation, not P&L entries. To reduce operating cost, we would require the co-operation of the government, employers, employees and its business partners.

As the aviation industry will need complete bailout assistance from the government, I will focus on the next most affected industry which is the non-essential retail and food and beverage (F&B) shops which will suffer at least a 50% drop in revenue in the next six months.

Key observations

When revenue drops by 50% and only the wage subsidy of RM600 is provided, the losses will be too much for the business to bear. Businesses without deep pockets will close within three months and all staff will be retrenched.

Without any additional cash injection from the government, we would need to allow exemption of payment of EPF for both employer and employee for six months. The impact to the bottom line is significant. The employees will get to increase their take home pay by 11%.

Landlord to the non-essential retail outlets and F&B outlets must support with a 30% rebate on rental for six months. Better to keep a good tenant than no tenant.

The best outcome (lowest losses) is when the companies are allowed to conduct a 10 to 20% pay cut across the board. This will be offset by the additional 11% (EPF) take home pay for the employee.

There is no future for any companies that suffer a sales drop of 70%. Unless you have deep pockets to restructure and reset, it is better to cut your losses and exit.

For businesses with loss of sales below 50%, you will not benefit from the RM600 worker’s subsidy. You can use the above table to conduct your own assessment and sales forecast. I can assure you that if your sales were to decrease by 30%, you will need to conduct a cost-cutting exercise across the board for the next six months. Hopefully with the exemption to pay EPF, you might not need to conduct a deep pay cut.

Employer’s obligations

Show true leadership. Cut your own pay before your workers’.

Be transparent with your workers. Communicate clearly.

Suffer together, profit together. When sales are back to normal, reinstate to normal pay like before. If you make a decent profit by the end of the year, deposit back the exempted payments into the employees EPF

Pay your landlords on time. One good turn deserves another.

Finance Minister’s obligations

Extend wage subsidy from three months to six months. It will cost the government an additional RM5.9bil. Now you would have given a balanced resilience budget of wage subsidy of RM11.8bil against welfare payments of RM12bil.

Since the government is not able to subsidise 75% of wages, allow business owners the flexibility of salary adjustment of workers according to affected industries. It will cost the government nothing.

Exemption to pay EPF for both employer and employee for all businesses in Malaysia for six months. Corporate Malaysia thanks you. It will cost the government nothing.

Help the landlords. Exempt payment of quit rent and assessment rates for all commercial and industrial properties by state government and local councils for six months. Let the state government and local councils share the pain. It will cost the federal government nothing.

Tips for SMEs

Be numbers-driven. Test out the viability of your business with different scenarios of percentage loss in sales. If it is not viable, preserve your cash by slashing cost aggressively or exit. Live to fight another day.

Be careful. Do not borrow more from the banks to finance your losses. You will be made a bankrupt in six months’ time. Only borrow for critical cash flow requirements knowing that you will be able to pay back and that your business is sustainable in the next 12-18 months. Do not put good money to chase after bad money. Personal bankruptcy affects your family as well.

Be calm. I know many of you are worrying about the MCO and the recovery process, if any, within the next six months. Plan with the knowledge that this will be an extended period of pain and uncertainty. Plan for your business to stay alive for the next six months. It is anybody’s guess what the future holds so no point in thinking that far ahead.

Be patient. I know many of you are angry at the lack of support from the government. The support will come soon. The government’s first focus is on welfare payment to the B40’s and the needy. Our Prime Minister will want to prove that he is indeed a Prime Minister for all Malaysian or he will suffer later at the polls. Let us just continue to engage with the government in a civil manner and I am sure we will have a positive outcome soon. It is not too late for the government to give additional fiscal stimulus to the SMEs once they realise mass unemployment will occur if they don’t step in.

Stay calm. Stay at home.

Published: https://www.thestar.com.my/business/business-news/2020/03/30/keep-calm-help-is-on-the-way

6/2020 – Government needs to do more to help ailing SMEs

IT has been a week of lockdown – staying at home – so I assumed that everyone gets to spend quality time with their family at home, all chilled and relax.

Instead I have been inundated with texts from small and medium enterprise (SME) owners who are worried sick at the total shutdown of economic activities in this country.

Do we have to pay the employees or can we ask them to utilise their annual leave or ask them to take unpaid leave?

The Human Resource Minister said we must pay, the Malaysian Employers Federation (MEF) differs and the National Union cries foul. It is only for 14 days for god’s sake, the employees pleaded. We can’t survive on half month’s salary!

Out come the lawyers with their different interpretation and the legal avenues available to all concerned. So I seek out an opinion from a very senior lawyer and his opinion is stated below:

The movement control order (MCO) issue is not governed by the Employment Act (which applies only to to employees earning RM2,000 or less per month and manual labourers or daily wage etc) but one of contract.

So it is a contractual issue between the employer and employee as stated in the terms of employment. The employment contract will normally state that salary must be paid. Unless the contract says salary must be paid for work done, then there may be an argument for not paying.

If there is force majeure or frustration (argument by MEF) in common law and Contracts Act, the remedy is to terminate – not suspension of pay. Some may say the underlying foundation of the employment contract is that the employee works.

However, the present circumstance is not that the employee is not willing to work. He/she is unable to work through no fault of theirs. The employer may likewise say the same.

Again, as a matter of contract law, it does not allow for suspension of pay. If at all, it is an issue of termination. If the business is ongoing, then selective termination amounts to redundancy or retrenchment issues.

In view of the above, the direction from the government regarding employment and salaries is not relevant.

The government cannot promulgate or change the law by issuing guidelines and orders, unless emergency is declared under the constitution and certain laws are suspended. It is based on and governed by existing legislation, and more pertinently in this scenario, by the law of contracts.

To all the SME employers, my advice to you is to pay your employees for the two weeks of MCO. This is not the time to argue who is right or who is wrong. Unless you do intend to reduce your staff count, then do a proper retrenchment exercise.

Then the announcement from our Prime Minister – that there could be an extension of one to two weeks to the current MCO. What are we to do? Based on the above argument, I am afraid employers will have to continue paying the salaries or retrench.

My lawyer friend then text me to say that her small practice will see a drop of 90% in business as there will be no activity, no production for four weeks.

Can’t have meetings, can’t see clients, land office closed, no litigation, conveyancing or corporate works. On top of that, being an employer, her firm still has to contribute to the employees’ EPF accounts. She is not sure how long her cash reserves will last.

All SME’s face the same problem as my lawyer friend. How long will my cash reserve last?

My accountant friend, who audits many SMEs, told me that most of his clients will not last more than six months if sales drop by 50% or more. Most SME’s will have to start rightsizing (a better word than retrenchment) their staff organisation chart starting April if no government assistance is forthcoming.

So far, Bank Negara has released RM30bil of liquidity into our banking system via the reduction of statutory reserve requirement (SRR).

Our Finance Minister (an ex-banker) has announced a RM3.3bil SME loan fund for those who are qualified (no idea on the qualifications – ask your bankers) and our commercial bankers have started deferring loans repayments etc to ensure the loans/facilities do not fall into non-performing loan (NPL) status.

These steps taken by Bank Negara and the Finance Minister will ensure that sufficient liquidity is available to the SMEs but only for those who qualify.

To date, most of the stimulus measures introduced by our government do not emphasise on job retention by SME employers. Only a RM600 payment a month for employees is introduced if they lose their jobs.

The withdrawal from EPF savings by individuals is a joke, it is not a government assistance. The RM2.2bil development fund is reserved for bumiputra small contractors.

The RM130mil fund for 13 state governments to disperse to petty traders means that RM10mil per state, which is laughed at by the Chief Minister of Sarawak, the only state government to-date to have announced a comprehensive stimulus and assistance programme to its citizens. Kudos to Sarawak.

If you compare our fiscal stimulus programme with that of other governments’ worldwide, France has allocated 13% of its GDP, United Kingdom 12%, Germany 9.9%, the Netherlands 7.7%, the United States 9.3% and Japan 2.5%. Malaysia and Singapore at 1.2% of GDP thus far. I understand that Singapore will be announcing its new stimulus initiative today while our Prime Minister will announce a comprehensive fiscal stimulus on March 30.

If you look at all the fiscal stimulus programme announced so far, the main thrust of the policies is to maintain employment – via direct subsidy on payroll – to encourage employers not to retrench. I am done shouting my voice hoarse at the Economic Action Council to act fast and decisively to save our biggest employers, the SMEs, and to encourage a continuous employment for our workforce.

If the government is broke and cannot afford a direct subsidy, then help the SMEs reduce their cashflow that is necessary to maintain their continuous operations. For just six months, suspend all EPF payments, all Inland Revenue Board prepayments (which is based on past year profits), sales and service tax, taxes by local governments etc. Make sure our SMEs can survive for the next six months.

Our Finance Minister, who is an ex-banker, must surely understand the systemic risk to our financial institutions and our economy should we fail to save the economic backbone of the country. Not to mention the human sufferings when mass unemployment occurs.

To our Finance Minister and the Economic Action Council, search your conscience.

Published: https://www.thestar.com.my/business/business-news/2020/03/25/government-needs-to-do-more-to-help-ailing-smes

5/2020 – Exempt EPF contributions to save jobs

For people of my age (60 and above), we have experienced three recessions, one financial crisis and one coronavirus (SARS) epidemic in our lifetime. We are about to witness the biggest (three-in-one) economic disaster ever if the world is not able to contain the transmission of Covid-19 within three months.

Covid-19 is easily transmitted and has now spread to 173 countries. The only way to stop it is via social distancing, which means a lockdown – basically staying at home and closing businesses.

The whole economy will come to a standstill as the supply chain and economic activity is disrupted. The global economy is now at a standstill as each country carries out different levels of a lockdown.

Even though the global stock market was due for a major correction after 13 years of an extended bull run, the coronavirus fear exacerbated its severity.

Again, depending on the severity and length of the Covid-19 crisis, this could be the mother of all stock market crashes. Watch it unfold. Trillions in economic value can disappear, impoverishing individuals and corporate entities in the process.

In times of crises, exchange rates worldwide become erratic and massive devaluation adds unique problems to countries. As industrial and economic output plummets, severe cash-flow deficits and non-performing loans (NPLs) will increase. All factors point to a financial crisis in the making.

A global recession is definitely on the way. Just like how Covid-19 made its way to Malaysia, we are seeping into an economic and financial crisis as our financial institutions become plagued with NPLs from failed businesses and unemployment.

Quite a grim scenario for Malaysia, assuming the recently announced stimulus package is our only solution to fight the imminent recession.

Luckily, it is understood that there will be a second stimulus package as soon as the National Economic Council is able to meet, which is most likely after the restriction order.

Assuming they meet in April, and hopefully not later, they will have to decide on a few key issues which I hope includes saving businesses and jobs (and not just their own jobs).

Malaysia will go broke this time around if we undergo a severe recession. Limited Petronas dividends, a much lower company and individual income tax rate if many businesses go bankrupt and paycuts will add on to a high unemployment rate.

We might not even have sufficient revenue to cover our high operating expenses and civil service wages.

Remember a bankrupt Greece some years ago having to cut civil servants’ pay by 40%?

Keeping Malaysians employed must be the main consideration. I have no clue what we can offer the illegal immigrants, who are a burden to our health system and the social fabric of our society.

To ensure employment for Malaysians, we need to ensure employers can survive this recession. The biggest employers are the SMEs. How can we help them?

For the service industry, normally, the biggest operating expenditure is salaries plus the 12% employer EPF contribution. When any business suffers a sales decline of more than 30%, it starts slipping into a loss position unless it cuts cost.

The Covid-19 affected industries are suffering from a sales decline of 50% to 80% and no company can survive this beyond six months.

The best solution is to exempt EPF contributions by both employer and employee for six months starting April 1,2020. This is direct help to preserve cash flow.

The most severe paycuts are normally in the range of 30% to 50%. For employers, a paycut of 30% plus 12% in EPF savings would mean saving cash flow by 42% instead of retrenching 42% of employees. For the more severe cut of 50%, the savings would be 62% of total payroll.

For employees who suffer paycuts of 30%, their take-home pay will only decline by 21% (EPF not deducted), which can still sustain their current lifestyle, albeit with some tightening of the belt.

Despite losing six months of savings in the EPF, it is still a better option to be employed, as it would be extremely difficult to look for another job in a recession.

Employers are advised to retain their staff strength, as when consumer confidence returns in six months’ time, there will be a boom in traveling, shopping and eating. Pent-up demand will be met by a fully experienced team.

Employers who make decent profits at the end of the year can always make it up to the employees by paying higher bonuses to replace lost savings.

There are some industries which are displaying Covid-19 symptoms – respiratory problems and difficulty in breathing, with some already in the intensive care unit suffering from severe no sales-no cash flow syndrome. The aviation, tourism and retail industries need a direct injection of immediate help in cash flow.

I believe the government needs to set up a Covid-19 rescue fund of at least RM20bil to tide things over. Khazanah Nasional Bhd, famed for its generosity, could pump another billion into Malaysia Airlines Bhd perhaps.

This fund should be implemented with full transparency and be fully recoverable from the beneficiaries. It should not be diverted into unintended pockets.

Perhaps, Bank Negara could cut the overnight policy rate by at least 50bps. The coronavirus does not wait and see. Everything is falling off the cliff. It is best to cushion the fall.

The first quarter of the year has been disastrous for business and individuals. Sales have fallen off the cliff, as Covid-19 hit the nation like a tsunami, leaving everyone with no time to prepare for a soft landing.

Published: https://www.thestar.com.my/business/business-news/2020/03/21/exempt-epf–contributions-to-save-jobs