In an effort to gauge SMEs’ sentiment on the economy and business environment, SME Bank has taken the initiative to publish its inaugural SME Sentiment Index. As a leading economic indicator, the Index provides a glimpse into the reality of SMEs on the ground.

Dato’ (Dr.) Aria Putera Ismail, the Group President / Chief Executive Officer of SME Bank said, “We are encouraged by the survey findings, where the SME Sentiment Index showed a positive reading of 53.8. Despite the perception that we are operating in an environment of uncertainty and unprecedented challenges, the Index reading of above 50 points revealed that SME entrepreneurs are optimistic, resilient and adaptive to future prospects. In fact, 57.3% of the respondents expect the business environment to improve over the next 6 to 12 months.”

Dato’ Aria added, “In line with the optimism, more than 70% of SMEs have indicated the importance of strengthening customer relationship and operational efficiencies. Nearly half of the respondents also view expansion plans as one of their most important focus areas this year.”

The SME Sentiment Index also showed that 73.2% of SMEs are anticipating an increase in their gross revenue leading to improvement in profitability over time. Specifically, 82.3% of the respondents from the Accommodation and F&B sub-sectors are confident of an increase in their revenue, in line with the reopening of international borders on expected higher foreign travelers.

SME Bank’s Chief Economist, Lynette Lee commented, “As revenue improves coupled with sustained demand, appetite to expand business may increase, which could lead to higher hiring. While 42.2% of SMEs are willing to hire, they may not be able to recruit sufficient manpower amid the current tight labour market conditions, straining their operating capacity. This labour shortage issue is more pressing for those labour-intensive industries, which in turn could limit their revenue projections.”

During this economic recovery phase, SMEs have been steadily picking themselves up and the feel good factor has gained traction. However, they now struggle with the rising operating costs due in part to supply chain disruptions and higher raw material prices. Two third of the respondents listed the cost of doing business as the top factor that will affect their business performance. This is followed by difficulty in retaining customers owing to rising competition and lack of capital. “Mindful of the negative impact to the customers, the SMEs are trying to switch to cheaper suppliers or find alternative raw materials before opting to pass the burden onto customers by raising prices of their products or services,” said Lynette.

Close to 80% of the respondents indicated the need for cash assistance via financing, despite the rising interest rate environment. The SME Sentiment Index also showed that 45% of the respondents are currently looking for additional financing solely to manage their working capital requirements.

The still accommodative monetary policy environment is supportive of access to financing. At the national level, SME financing extended by financial institutions expanded by a resilient 7.5% YoY in April 2022 (1Q 2022: 6.0%). While gross impaired financing loan/financing ratio of the SME financing in the banking system remained intact, at 3.7% in April, the rising interest/profit rate environment may pose a downside risk to the assets quality and may cause financial institutions to tighten their underwriting standards.

Our Chief Economist believes that the SME Sentiment Index revealed that SMEs are hopeful and positive about the recovery prospects over the next 6 to 12 months and they remain steadfast in facing the challenges ahead. Nevertheless, developments on the external front which include a tighter global monetary policy environment, prolong supply chain disruptions, geopolitical tensions, higher inflation, risk of recession and the emergence of contagious diseases would have spillover effects on the domestic economy and could derail the country’s recovery trajectory.

The full report of the SME Sentiment Index 2022 published by SME Bank can be obtained at www.smebank.com.my/en/sme-sentimentindex.