Domestic-oriented sectors to drive economy as sentiment remains sluggish

By DASHVEENJIT KAUR/ pic by TMR GRAPHIC

THE stable domestic-oriented sectors will remain the underlying economic driver over the next six months amid sluggish general business optimism, based on the latest RAM Business Confidence Index (RAM BCI).

The rating agency said the sluggish outlook for the fourth quarter of 2019 (4Q19) until the 1Q20 is a persistent trend since early this year.

“Going into 2020, the comparatively stable domestic-oriented sectors — which experienced a slight improvement in sentiment this quarter — will remain the underlying economic driver.

“The resumption of big-ticket construction and public-sector infrastructure projects, as well as the resilience of the business services sector, bode well for Malaysia’s growth prospects,” RAM Holdings Bhd said in a statement yesterday.

Although the latest readings for corporates and small and medium enterprises (SMEs) converged at 53.2, RAM highlighted that these two cohorts face different circumstances and prospects.

“The main drivers of better SME sentiment this quarter are greater optimism on access to bank financing and improved performance indicators,” it added.

The agency said SMEs’ performance is highly influenced by new orders and projects. “As such, their business prospects tend to be quite volatile,” it added.

Meanwhile, the report stated that the persistently sluggish corporate sentiment signals their view on the current economic environment, which has been plagued by uncertainties since 4Q18.

“At the same time, US-China trade tensions have worsened, along with firmer signs of weaker global demand this year,” it added.

In particular, the sentiment of export-oriented firms declined 3.6 points to 54 in the latest survey.

Additionally, a higher proportion of firms (45.6% for surveyed corporates and 44.8% for SMEs) now cite “weak economic conditions” as their main challenge in the next six months.

RAM highlighted that prolonged global uncertainties have also led to large swings in firms’ business performance expectations, underlining the challenges faced by their business operations.

“Previously a trait only observed among SMEs, corporates now also has yo-yoing expectations on their performance in 2019. The volatility is significantly stronger among export-oriented firms given their direct exposure to the US-China trade war.

“Based on our interaction with selected respondents, firms have pointed the finger at softer demand from China and local clients that service the Chinese market amid the impact from the US-China trade spat,” it said adding that order sizes have shrunk and become lumpier as their clients have become more cautious in inventory management.

RAM stated that such uncertainties have also affected corporates’ capacity-building intentions, which have undergone successive declines through most of 2018 and 2019.

Notably, the most recent survey results suggest that domestic resilience will support business optimism in the near term, looking at how the earlier downtrend in capacity-building activities has been arrested, with improvement sighted in the last two surveys.

The majority of firms are operating at normal capacity, with little sign of industrial slack.

The access to bank financing sub-index for SMEs spiked up 4.6 points to 54.4 in the latest survey — the highest reading in the last two years.

It said the corporate sentiment on construction showed relatively broad-based progress in the latest survey, especially on business performance expectations amid the resumption of job flows.

“This sector’s healthier prospects may help balance the downside risks from external headwinds, given the notable multiplier effect it has on economic activities,” RAM said.