Despite a 6-month loan moratorium, Malaysia's SMEs fret over cash flow and uncertainty

Despite a 6-month loan moratorium, Malaysia's SMEs fret over cash flow and uncertainty

Malaysia has slowly started easing coronavirus-related curbs
Malaysia has slowly started easing coronavirus-related curbs AFP/Mohd Rasfan

KUALA LUMPUR: These days, Mr Low Chung King, the secretary-general for the Hardware and Building Materials Merchant Association of Kuala Lumpur and Selangor, often field requests for assistance from members facing supply issues.

“Every hardware retailer is facing cash flow issues right now,” said Mr Low.

All members in his trade association have opted for a six-month loan moratorium offered by the banks, given that the economy had virtually ground to a halt due to the COVID-19 pandemic.

Loan Moratorium 03
A hardware store opens for business in Petaling Jaya. Many of such businesses have opted for a six-month loan moratorium in order to preserve whatever cash they had in hand. (Photo: Vincent Tan) 

“We can still buy on credit,  but credit terms have been shortened,” said Mr Low. He added that many members had forked out their personal savings to purchase materials and pay off creditors.

Although the sales of household DIY items had increased, these only constituted about 20 per cent of retailers' revenue, he explained.

Their main earnings were from bulk sales of hardware and construction material to construction projects, which were affected by restrictions to combat the spread of COVID-19.

Small and medium enterprises (SMEs) are now trying to reduce overheads and costs, in preparation for October when the loan moratorium ends.

“Some have stopped ordering in bulk, and only obtain supplies when there are orders. Others have had to let go of workers, or discussed with their employees about pay cuts to keep them employed,” Mr Low said.

READ: Small, medium businesses feel brunt of lockdown pain, says survey

LOAN MORATORIUM A WELCOME REPRIEVE

For digital marketing agency owner Brian Veerasamy, the loan moratorium was a welcome reprieve, as he was half-way paying off a 30-year housing loan.

Even with working from home and keeping overheads low, Mr Veerasamy said without the moratorium, he might have had to default on his home installments by May.

“During Mar until May, work dried up because of the movement control order. That’s understandable, no one was moving around. At least with the recovery phase now, businesses are reopening and the SMEs are also starting to understand the importance of going digital,” he said. 

Malaysia entered the conditional phase of the movement control order (MCO ) on May 4, when most businesses were allowed to reopen.

Having signed on a couple of clients, Mr Veerasamy said the agency would able to start generating revenue from July onwards, allowing him to rebuild his financial buffers and meet his obligations.

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CALLS FOR MORATORIUM TO BE EXTENDED

Under the moratorium announced by the government, all loans were automatically deferred for six months. But there are now calls for Putrajaya to extend the moratorium.

Mr Michael Kang, the current president of trade association SME Malaysia, said up to 90 per cent of 15,000 members have taken advantage of the loan moratorium offered.

“Even now, they’re not certain whether they’ll be able to pay their installments by October or not. We ran a survey, and up to 60 per cent of our members said that for the past three months, they had had no income,” Mr Kang said.

Loan Moratorium 01
SME Malaysia's national president Michael Kang is concerned over a possible major business wipeout come October, when the loan moratorium ends for both personal and business loans. (Photo: )

For the minority who opted out of the moratorium, Mr Kang added, many of them were in essential businesses such as food and beverage, or manufacturing medical equipment. This allowed them to carry on as usual. For some, their revenue went up.

The issue he added, was that even with the recovery phase of the MCO and resumption of “normal” life with health protocols, feedback from SMEs was that sales were only back to 20 per cent to 30 per cent of pre-pandemic levels.

“If you are manufacturing food-related products or fast-moving consumer goods, it is okay because consumers are still using items. But if you are doing export sales, things are terrible because the majority of the world is still in lockdown one way or another.

“Orders have been postponed, some until year-end, others cancelled,” Mr Kang added.

Businesses, he added, needed about three to four months for their revenue to stabilise, after nearly three months of no sales and no cash flow during the MCO which started on Mar 18.​​​​​​​

Loan Moratorium 04
A drive around one of the Klang Valley's more popular commercial districts on Jun 26, 2020 showed several vacant shop units, either up for sale or looking for new tenants. (Photo: Vincent Tan)
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“So what a lot of members are hoping for is that the moratorium is extended, at least until the end of the year to give more breathing room, at least by then things will be more stable,” Mr Kang said.

An alternative, he added, was for the government to come up with more loan facilities to help SMEs with their cash flow problems during the recovery period.

“We are not asking for more grants or subsidies, because we know the government has no money either, but you have credit or loan facilities, even from RM50,000 (US$11,687) to RM200,000, that will help roll some cash over after three months of no sales,” Mr Kang explained.

READ: Despite tight financial position, Malaysia’s economy is expected to recover gradually this year, say analysts

He claimed that some businesses have resorted to loan sharks as an interim means of survival.

“The interest rate is at 2.75% a month, that’s high. But the businesses calculate that if they can make 10 per cent or more in sales, there will be enough to pay the interest,” Mr Kang said.

HIGH HOUSEHOLD DEBT MAY HAVE KNOCK-ON EFFECT FOR BUSINESSES: ANALYST

Mr Adli Amirullah, a senior economist at the Institute for Democracy and Economic Affairs (IDEAS), pointed out that high household debt in Malaysia could compound the problems for businesses down the road, as spending begins to dry up.

"The six-month moratorium is short-term relief for households, as the root problem is our remarkably high household debt, at around 82.7% of GDP in 2019,” Mr Adli told CNA.

“The concept is simple, if our household debt is low, they would have more cash in hand, and be able to spend it in the economy during the crisis even without a loan moratorium,” he said.

READ: Rich, but household debt is growing: A time bomb for South Korea?

From the business side, Mr Adli explained that companies would struggle to make ends meet, when household spending begins to dry up.

“As social and business activities are shut down due to the MCO, loss of business income and retrenchments are expected to contribute to the rise in loan defaults,” he said.

These defaults, he added, are likely to escalate after the moratorium ends in October if companies and individuals were unable to continue servicing their debts due to the continued business losses and layoffs.

In turn, the defaults, combined with the high household debt, would end up negatively impacting Malaysia’s credit landscape in the medium term, Mr Adli added.

People buying food at a supermarket in Singapore amid fears of a disruption to Malaysian supplies.
People buying food at a supermarket in Singapore amid fears of a supply disruption after Malaysia announced the closure of its borders, (Photo: Reuters/Edgar Su)

This in turn would lead to credit and liquidity problems for banks as well.

On one hand, Mr Adli explained, the liquidity pressure arising from  the debt moratorium would be offset by weak loan demands and an increasing number of borrowers opting out of the automatic moratorium. 

On another hand, the moratorium might also lead to a greater build-up in credit losses caused by defaults once loan payments start kicking in again.

“Furthermore, the regulations that soften the economic shock will end up becoming a risk for banks, as it prevents the banks from taking early restructuring or recovery action on specific borrowers.”

READ: Commentary - Malaysia's economy has surprised many despite COVID-19. But for how long more?

For Mr Veerasamy, the digital marketing agency owner, the situation is still precarious right now.

“Anything can happen still between now and October, or even after. (There could be) a bigger second pandemic wave but at least I could survive these six months for now,” he said.

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Source: CNA/vt

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