COVID-19 BUSINESS PULSE SURVEYS ROUND 5 August 2022 Firms’ Recovery from COVID-19 in Malaysia Results from the 5th Round of COVID-19 Business Pulse Survey Smita Kuriakose Finance, Competitiveness and Kok Onn Ting Innovation Global Practice Sarah Hebous Haris Tiew 2 COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 Acknowledgements This brief was prepared by Smita Kuriakose (Senior Economist), Kok Onn Ting (Private Sector Specialist), Sarah Hebous (Consultant) and Haris Tiew (Consultant). The survey instrument was customized for Malaysia by Smita Kuriakose and Kok Onn Ting. Survey implementation and data processing was done by Green Zebras Bhd. The brief and accompanying slide deck were designed by Kane Chong. This brief and the accompanying slide deck were prepared under the guidance of Cecile Thioro Niang (Practice Manager, FCI), and Yasuhiko Matsuda (Country Manager, Malaysia). For more information, please contact Smita Kuriakose (skuriakose@worldbank.org) COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 3 Key findings • The survey implemented in August 2022 shows that economic recovery is taking root in Malaysia as evidenced by the trends in operating hours, sales and employment. The outlook of firms is positive and with more than 38% of firms relative to 34% of firms in R4 BPS expecting higher sales for Q4 2022. With international borders being opened, firms’ recovery has accelerated across regions and firm sizes. However, this brings about new challenges for firms such as shortages of labor, rising input costs and increasing market competition. » Employment shortages have not abated since Round 4, however firms remain optimistic: 73% of firms expect skilled worker shortages and 79% of firms expect unskilled shortages to be resolved in the next 6 months. » 43% of firms felt rising input costs with an average rise of 12% compared to pre-COVID-19 level. » The share of firms that felt competition has increased at 56% far exceeds those that felt competition is constant (39%) or has declined (5%). The automotive sector has the most firms that felt the increase in competition. • Firms adjust to the new environment through digitalization and investing in modernizing more advanced business functions. » Investments in new equipment/digitalization has accelerated compared to pre-COVID-19 levels, rising from RM 1.6 million (US$390,000) in 2019 to RM1.9 million (US$460,000) in 2021. » Firms are investing more in advanced business functions, such as supply chain management and production planning compared to previous survey rounds, where firms focused on digitalizing sales and marketing. » The likelihood for firms to invest in new equipment or digitalization is linked to firms’ efforts to address market frictions and achieve greater efficiency.  • The cash-flow situation for firms remains stable relative to the survey in February-March 2022. Firms express the most important support required from the Government for the next six months is to accelerate digitalization. • As the economy recovers, the survey explored potential areas and trends pertinent to inform medium-term policy reforms: » Price controls, which Malaysia deploys extensively affects 49% of firms surveyed, out of which, 37% say they reduce production. This can exacerbate the shortages of the product in question. » Small firms’ main strategy is to accept price controls at 37% of firms as they have limited capacity to pivot away from price controls, relative to medium (48%) and large firms (51%), where they can substitute away, implying a disproportionate burden of the policy falls on small firms. » Electronics sector as a major export sector lagged other sectors such as the automotive sector in deploying resilience supply chain and area business continuity practices, raising broader questions about Malaysia’s resilience to face disasters. » The majority of firms are aware of ESG (67%) and out of which, 80% are willing to adopt ESG standards. However, the major constraint to adopting ESG standards is increased financial costs. Firms named clear regulations ahead of tax incentives for firms to transition to carbon neutrality. 4 COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 Methodology The COVID-19 Business Pulse Survey (BPS) is a rapid survey designed to measure the various channels of impact of COVID-19 on firms, firm adjustment strategies, and public policy responses. The World Bank, in collaboration with a private survey company, conducted the 5th round of the Malaysia BPS in August 2022, following the 1st round in October 2020, 2nd round in Mid-January to February 2021, 3rd round in July 2021 and the 4th round in February-March 2022. Firms were sampled randomly from an online business panel database, which consists of 100,000+ companies in all sectors and sizes, across Peninsular and East Malaysia. A minimum sample size was obtained for sectors that are important to Malaysia’s economy and are sensitive to the COVID-19 crisis (export-oriented activities: electronics, automotive, tourism related activities) while preserving the sectoral shares in the sampling frame1 . The survey was conducted online and yielded 1,500 responses from respondents in senior management positions at their company (i.e. owners, C-suite or Director level). Malaysia and the Timeline Timeline of Various Stages of Movement Control Order and International Re-opening Terminology Period Movement Control Order (MCO) 18 March – 12 May 2020 Conditional Movement Control Order (CMCO) 13 May – 9 June 2020 10 June – 31 August 2020, then extended to Recovery Movement Control Order (RMCO) 31 December 2020 2nd CMCO 14 October – 7 December 2020 2nd MCO 13 January – 4 March 2021  3rd CMCO 5 March 2021 onwards 12 May – 28 June 2021 3rd MCO (upgraded to Full MCO on 1 June 2021) Re-opening of International Borders 1 April 2022 1 Due to lack of statistics about the true universe of firms, all analyses are done without weights. COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 5 6 COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 Operational Status and Change in Sales Recovery is taking hold with the majority of firms reverting to fully open status across regions and firm sizes, with firms recording positive sales relative to pre-COVID-19. The fifth round of the Business Pulse Survey (BPS) shows firms recovering continuously with improving operational status across geographical regions as in Figure 1. However, small firms on average are still operating below full capacity which is also slightly below the operational capacity of medium and large-sized firms (Figure 2). FIGURE 1 FIGURE 2 Average change in hours of operations for firms Average change in hours of operations for firms return to pre-COVID-19 levels, by region return to pre-COVID-19 levels, by size Being open (full or below capacity) Being open (full or below capacity) Share of firms (%) Share of firms (%) 100 100 Kuala Lumpur Small Putrajaya Medium Cyberjaya 90 90 Large Other Central Northern 80 80 Southern Eastern 70 East Malaysia 70 60 60 MCO (Mar−Apr 2020) 1st CMCO (May−Aug 2020) Oct 1−15, 2020 2nd CMCO (Oct 14−Dec 7, 2020) Jan 15−Feb 10, 2021 3rd CMCO (Feb 10−May 31, 2021) Jul 8−28, 2021 NRP (Oct 1−Dec 31, 2021) Feb 4−Mar 4, 2022 Aug 10−Aug 30, 2022 MCO (Mar−Apr 2020) 1st CMCO (May−Aug 2020) Oct 1−15, 2020 2nd CMCO (Oct 14−Dec 7, 2020) Jan 15−Feb 10, 2021 3rd CMCO (Feb 10−May 31, 2021) Jul 8−28, 2021 NRP (Oct 1−Dec 31, 2021) Feb 4−Mar 4, 2022 Aug 10−Aug 30, 2022 Sales have reverted to positive figures since the start of the pandemic and recovery is broad-based across sectors. The average change in sales relative to the same period before COVID-19 recorded growth of 5%, since the pandemic started in 2020, indicating that recovery is taking root (Figure 3). Additionally, all sectors achieved positive change in sales relative to the same period pre-pandemic as in Figure 4. While changes in sales remain positive, the manufacturing sector faced a deceleration in sales growth in August 2022, possibly indicative of supply chain disruptions and rising inflation in the global economy. FIGURE 3 FIGURE 4 Average change in sales relative to same period Average change in sales relative to the same pre-COVID-19 period pre-COVID-19, by sector Average change in sales relative to same period pre-COVID-19 (%) Change in sales relative to same period pre-COVID-19 (%) 10 10 Agriculture 5 Manufacturing 0 Construction 0 Services -10 -1 -5 -20 -10 -8 -12 -30 -16 -40 -20 -18 MCO (Mar−Apr 2020) 1st CMCO (May−Aug 2020) Oct 1−15, 2020 2nd CMCO (Oct 14−Dec 7, 2020) Jan 15−Feb 10, 2021 3rd CMCO (Feb 10−May 31, 2021) Jul 8−28, 2021 NRP (Oct 1−Dec 31, 2021) Feb 4−Mar 4, 2022 Aug 10−Aug 30, 2022 -22 -22 -26 -30 MCO (Mar−Apr 2020) 3rd CMCO (Feb 10−May 31, 2021) 1st CMCO (May−Aug 2020) Jul 8−28, 2021 Oct 1−15, 2020 NRP (Oct 1−Dec 31, 2021) 2nd CMCO (Oct 14−Dec 7, 2020) Feb 4−Mar 4, 2022 Jan 15−Feb 10, 2021 Aug 10−Aug 30, 2022 COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 7 Recovery is broad-based with firms of all sizes achieving positive changes in sales relative to the same period pre-pandemic (Figure 5). Nonetheless, large firms still lead the way in sales increase following the re-opening of international borders on April 1, 2022 (Figure 6). FIGURE 5 FIGURE 6 Average change in sales relative to the same Average change in sales during the past 30 days period pre-COVID-19 compared to Q1 2022 Change in sales relative to same period pre-COVID-19 (%) Average change in sales during past 30 days compared to 1st quarter 2022 (%) 10 Small 20 Medium 0 Large 16 -10 15 -20 12 -30 10 -40 MCO (Mar−Apr 2020) 1st CMCO (May−Aug 2020) Oct 1−15, 2020 2nd CMCO (Oct 14−Dec 7, 2020) Jan 15−Feb 10, 2021 3rd CMCO (Feb 10−May 31, 2021) Jul 8−28, 2021 NRP (Oct 1−Dec 31, 2021) Feb 4−Mar 4, 2022 Aug 10−Aug 30, 2022 5 4 0 Small Medium Large Controlling for sector, and exporter status. Going forward, firms’ expectations on sales are optimistic in the next 3 months. The proportion of firms that expect sales to increase in the next three months relative to the same period last year increased from 34% in Round 4 of the BPS to 38% in Round 5 of the BPS (Figure 7), in line with the overall economic recovery and positive outlook for this year. Additionally, firms in the Tourism & Transportation sector have the third most optimistic outlook in August 2022 buoyed by the reopening of the international border in the most recent round of the BPS (Figure 8). Firms in the electronics and automotive sectors are also adjusting their outlook with lower sales growth compared to Round 4 of the BPS in February-March 2022. FIGURE 7 FIGURE 8 Expected change in sales in 3 months relative to Expected change in sales in the next 3 months the same time one year ago relative to the same time one year ago, by sector Expected change in sales in 3 months relative to same time one year ago Expected change in sales (%) Share of firms (%) 60 57 56 15 53 10 5 38 0 40 34 -5 26 -10 Other Commerce Construction Electronics Automotive Commerce (food & beverage) Agriculture & Mining Other Manufacturing Fin./Real Estate/Biz Services Tourism & Transportation Utilities Other Services 21 20 9 5 0 Increase Remain about the same Decrease Jul 8−28, 2021 Feb 4−Mar 4, 2022 Aug 10−Aug 30, 2022 Jul 8−28, 2021 Feb 4−Mar 4, 2022 Aug 10−Aug 30, 2022 8 COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 With Recovery, New Trends Emerge With international borders re-opening, this section discusses some of the bottlenecks that restrain firms from further recovery, which ultimately impact the pace of growth in the economy. Employment Employment shortages persist but employers’ optimism remains persistent. There has been minimal change in the share of firms that have unfilled positions (Figure 9), contrary to the expectations of firms in the previous round of the BPS where 80% expected these shortages to be resolved in the short term. Nonetheless, optimism persists among employers expecting both skilled and unskilled shortages to be resolved in the short term (Figure 10). FIGURE 9 FIGURE 10 Unfilled positions in firms Anticipated duration of staffing difficulty Unfilled positions Anticipated duration of sta ng di culty Share of firms (%) Share of firms (%) 40 38 100 37 1 month 9 8 8 9 1−3 months 3−6 months 16 15 12 19 6−12 months 80 30 12+ months 27 31 60 34 30 20 40 32 32 10 32 35 20 17 16 9 8 0 0 Feb 4−Mar 4, 2022 Aug 10−Aug 30, 2022 Feb 2022 Aug 2022 Feb 2022 Aug 2022 Skilled labor Unskilled labor COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 9 Impact of rising costs on firms The overall rise in costs affects a substantial proportion of all firms with non-exporting firms being more affected than exporting firms. 43% of firms experienced a rise in input costs whereas half of the firms surveyed did not face any substantial change in their input costs (Figure 11). Firms that faced increased input costs reported an increase in costs of 12% compared to cost levels pre-pandemic (Figure 12). Exporting firms are slightly less affected by the overall rise in costs with the average increase in input costs of 9% compared to 13% for non-exporting firms. FIGURE 11 FIGURE 12 Change in input costs compared to pre-COVID-19 Average change in input costs compared to pre-COVID-19 Change in input costs compared to pre-COVID-19 Average change in input costs compared to pre-COVID-19 (%) Share of firms (%) 50 15 50 13 43 12 40 10 9 30 20 5 10 6 0 0 Increase Remain about the same Decrease Overall Non-exporter Exporter With rising volatility in the input costs and an environment of monetary policy adjustments, there are changes in firms’ perception towards ending government support programs. The share of firms that perceive the end of government support being harmful has increased from 13% in BPS Round 4 to 20% in BPS Round 5. Correspondingly, respondents that answered “no need for government support to continue” dropped from 33% in BPS Round 4 to 27% in BPS Round 5 (Figure 13). FIGURE 13 Firms’ sentiment on the Government’s end of stimulus packages Impact on company − end of stimulus package Share of firms (%) Feb 4−Mar 4, 2022 33 49 13 5 Aug 10−Aug 30, 2022 27 49 20 4 0 20 40 60 80 100 No need, recovering A ected, but can survive Harmful, not yet recovered Critical, risk of insolvency 10 COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 Trade Exposure to trade has not significantly changed post-pandemic. However, large firms were more affected by export disruptions during the pandemic than small firms. The average share of exports in total sales has remained at the same level at 40% in 2019 to 41% of total sales in 2021 (Figure 14). However, more large firms have stopped exporting or selling to multinationals located in Malaysia since the pandemic started, with 31% of large firms affected, compared to 21% of medium-sized firms and 10% of small firms (Figure 15). FIGURE 14 FIGURE 15 Share of exports in total sales (for current Share of firms selling to exporters or exporters) multinationals located in Malaysia Share of exports in total sales Selling to exporters or multinationals located in Malaysia (%) Share of firms (%) 40 41 100 40 20 31 80 37 37 10 30 60 21 21 20 31 40 70 10 48 20 42 32 0 0 2019 2021 Overall Small Medium Large No Stopped since pandemic Yes Only asked for current exporters. Only asked for current exporters. Since the start of the pandemic, the total share of importers has declined from 80% in 2019 to 73% in 2021 (Figure 16). This could be due to multiple factors, such as global value chain disruptions. Despite the declining number of importers, the average share of imported intermediate inputs and raw materials in total imports of firms has increased from 36% in 2019 to 39% in 2021 (Figure 17). FIGURE 16 FIGURE 17 Share of firms that are importers Share of imported intermediate inputs raw materials in total imports Importers Share of imported raw materials in total imports Share of firms (%) (%) 80 40 39 80 36 73 30 60 40 20 20 10 0 0 2019 2021 2019 2021 p−value of mean di erence test is 0.00 COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 11 Amidst economic recovery, the hiring of foreign FIGURE 18 workers has increased with exporting firms having Share of foreign workers to total workers a higher share of foreign workers within the firm Share of foreign workers (%) than non-exporting firms. Overall, the share of 25 24 foreign workers within firms has risen from 15% in 22 January-February 2021 to 19% in August 2022 in line 20 20 with the recent economic recovery and increased 17 17 international mobility. At the same time, exporting firms hire more foreign workers with an average of 15 14 22% of the total workers being foreigners compared 12 to non-exporters at 17%, corresponding with the 10 10 rising export demand (Figure 18). 5 0 Non−Exporter Exporter Jan 15−Feb 10, 2021 Jul 8−28, 2021 Feb 4−Mar 4, 2022 Aug 10−Aug 30, 2022 Market competition The majority of firms felt that overall market competition had been rising post-pandemic. 56% of firms felt competition had increased in the last 12 months, outnumbering 39% of firms that felt competition had remained the same (Figure 19). The automotive sector reported the largest share of firms (at 74%) that felt competition had intensified in the last 12 months (Figure 20). This increased competition in the automotive sector could be driven by car manufacturers launching new models at the same time, during the post-pandemic period. FIGURE 19 FIGURE 20 Firms’ Perception of Competition in the last 12 Firms’ Perception of Competition in the last 12 months months, by sectors2 Competition during last 12 months Competition increased during last 12 months Share of firms (%) Share of firms (%) 60 80 74 56 68 59 61 60 52 54 55 49 50 44 47 40 39 40 20 0 Other Commerce Electronics Utilities Other Manufacturing Tourism & Transportation Commerce (food & beverage) Agriculture & Mining Fin./Real Estate/Biz Services Other Services Construction Automotive 20 5 0 Competition has Competition Competition has increased is the same decreased 2 The utilities sector in this figure refers to the commercial firms within the utilities sectors. 12 COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 Adjustment Mechanisms Digitalization remains the most popular adjustment strategy for firms and half of the firms offering remote work are planning to downsize their offices. 47% of firms cited increased use of digital platforms as an adjustment strategy. However, the use of this strategy has tapered off from a high of 58% during the first BPS in October 2020 (Figure 21). Another popular strategy among firms is to offer remote/hybrid work and 34% of firms have increased their remote work despite the re-opening. Nearly half of the firms that offer hybrid or remote work (52% of firms) plan to reduce office space in the next 6 months with an average reduction of 33% of the current office space (Figure 22). FIGURE 21 FIGURE 22 Strategies implemented to deal with COVID-19 Share of firms offering remote/hybrid working arrangements that plan to reduce office spaces in the next 6 months Strategies implemented or planning to implement to deal with COVID-19 Plans to reduce o ce size in the next 6 months as a result of remote/ Share of firms (%) hybrid working arrangements 52 58 50 57 Increased use of digital 52 platforms 48 47 40 40 33 35 Reduce input costs 31 30 32 38 44 45 20 Increase in remote work 42 33 34 10 0 20 40 60 Oct 1−15 2020 Jan 15−Feb 10 2021 Jul 8−28 2021 0 Feb 4−Mar 4 2022 Aug 10−Aug 30 2022 Share of firms (%) Average reduction (%) Investments in new equipment, software or digital solutions are increasing post-pandemic and more encouragingly, investments are shifting into more advanced business functions. Average investments in digital technology by firms has been accelerating, rising from RM1.5 million (approximately US$390,000) in 2019 to RM1.9 million (approximately US$460,000) in the past 12 months. Firms are investing in advanced business functions over customer facing functions. 54% of firms invest in production technologies, over 46% investing in marketing and 31% in online sales (Figure 23). Investments in more advanced business functions, such as production technology are largely driven by mid-size (62%) and large firms (60%) [Figure 24]. However, small- sized firms largely invest in business administration (at 42% of firms), at the same level as those investing in marketing and customer relations (which was also the most popular investment for small firms in January- February 2021 by a large margin). COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 13 FIGURE 23 FIGURE 24 Firms that invested in new equipment, software Firms that invested in new equipment, software or digital solutions in the past 12 months, by or digital solutions in the past 12 months, by business functions business functions and firm size Investment in new equipment software or digital solutions Investment in new equipment software or digital solutions Share of firms who invested in the past 12 months (%) Share of firms who invested in the past 12 months (%) 60 54 42 42 49 35 Small 46 33 45 30 23 40 37 62 57 31 52 Medium 46 28 20 20 60 49 48 Large 48 42 41 0 0 20 40 60 Production technologies Supply chain management Production technologies Supply chain management Production or service planning Business administration Production or service planning Business administration Marketing and customer relations Online sales and payment methods Marketing and customer relations Online sales and payment methods The likelihood for firms to invest in new equipment or software or digital solutions is linked to firms’ efforts to address market frictions and achieve greater efficiency. Investments in new equipment, software, and digital solutions are positively correlated to firms’ desire to achieve energy efficiency, address supply chain disruptions and achieve greater efficiency in the use of the workforce (shortages of labor) [Figure 25]. Firms’ likelihood to invest in new equipment/software is also positively correlated with firm’s effort to address environmental and sustainability factors. FIGURE 25 Correlates with likelihood to invest in new equipment/software Correlates of firm’s likelihood to invest in new equipment/software 0.3 0.2 0.1 0 -0.1 -0.2 Change in Wages Foreign Labor Unfilled Positions Resilient Supply Chain Energy Consumption Plan Carbon Neutrality Plan ESG Awareness Medium Large Electronics Automotive Other Manufacturing Utilities Construction Commerce (food & beverage) Other Commerce Tourism & Transportation Fin./Real Estate/Biz Services Other Services Exporter Coe cient estimates from regressing likelihood of investing in new equipment on wage changes, availability of unfilled positions, sustainability plans, as well as baseline sector and employment size FEs. 14 COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 Government Support As economic recovery is taking root concurrently with the re-opening of international borders, the survey explores areas and trends pertinent to inform medium-term policy options. The cash flow situation for firms did not change significantly from February 2022 to August 2022, with large firms building up larger cash buffers. Firms cited that the average time until they face cash flow shortage is approximately 17 weeks, which has not changed since the previous round of the BPS in February-March 2022 (Figure 26). Meanwhile, the median number of weeks until firms face expected cash flow shortage has increased from 7 weeks in Round 4 of the BPS to 8 weeks in Round 5 of the BPS. Large firms have more cash buffers with 22 weeks of cash until firms experience shortages, compared to small at 14 weeks and medium- sized firms at 15 weeks (Figure 27). FIGURE 26 FIGURE 27 Average time until cash flow shortage Average time until cash flow shortage, by firm size Average time until cash flow shortage Average time until cash flow shortage Number of weeks Number of weeks 19 40 50 16 18 17 21 40 18 30 18 17 32 15 16 14 30 13 20 20 22 17 17 19 20 17 15 16 15 15 14 10 10 0 0 S M L S M L S M L Jul 8−28, 2021 Feb 4−Mar 4, 2022 Aug 10−Aug 30, 2022 Jul 8−28, 2021 Feb 4−Mar 4, 2022 Aug 10−Aug 30, 2022 Without access to external finance With access to external finance Without access to external finance With access to external finance Out of the firms that benefited from deferral of credit or loan payments as part of the Government’s support stimulus3 , 55% of firms opted to restructure their loans and were charged interest over deferred payments. Despite a majority of those firms had their loans restructured, 28% were reportedly charged interest over the deferred payments without expecting it (Figure 28). Expediting and expanding digitalization programs for firms is the most sought after support needed from the Government in the next six months. 17% of firms cited that the most prioritized government support needed is to expedite and expand digitalization programs to save costs and increase efficiency (Figure 29). This is followed by the expeditious approvals and disbursements of subsidies for price control items (13% of firms) and a further 12% of firms also cited that greater clarification on price control is needed from the Government, ahead of climate risk support. Firms also prioritize further digitalization of government services through the increase of e-Government use as well as the expedition of e-customs transition, at 9% and 8% respectively. 3 This includes deferral of credit/loan payments, suspension of interest payments or rollover of debt. COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 15 FIGURE 28 FIGURE 29 Firms refinancing and interest charged during Firms’ ranking of most needed support from the moratorium period Government in the next 6 months Interest charged over deferred payment during moratorium Government support priorities Share of firms (%) Share of firms (%) Expand digitalization programs 17 Expedite subsidy disbursement 55 13 for price control items Clarify price control mechanisms 12 Climate risk support 10 28 Increase market e ciency 10 Eliminate need for AP 9 13 Increase e-Government use 9 Expedite e-Customs transition 8 4 Clarify foreign labor policy 6 Expedite immigration approval 5 0 20 40 60 Others 1 Yes (loan restructured) Yes No Don’t know 0 5 10 15 20 Medium-term Policy Options This section explores medium-term policy options that can boost economic growth by supporting firms’ competitiveness. These include assessing the impact of price controls on firms, increasing the resilience of supply chain management and enhancing green competitiveness. Price control impact on firms Following the Central Bank’s concern and Malaysia’s extensive use of price controls, the survey investigates the impact price controls have on firms. While Bank Negara Malaysia’s Annual Report 2021 acknowledged that price controls can benefit certain target groups, it also cautioned that “the pervasive use of price controls could result in supply shortages” (BNM, 2021) 4 . The World Bank Malaysia Economic Monitor, June 2022 edition also showed that Malaysia deploys the highest number of price controls in the region. Price control instruments if deployed over a long period distort the price signal and could result in inefficiencies in the market. The survey reveals price controls affect about half of the firms surveyed (Figure 30), of which 12% are severely impacted. Price controls affects 49% of the firms, out of which 51% experience mild impact, namely lower profit margins, while 37% felt no impact. 12% of the firms severely affected by the price controls resulting in negative cash flows as control prices were set below their costs (Figure 31). Additionally, out of the firms affected by price controls, 37% of firms indicated they reduced current production by an average of 24%. 4 Refer to “Cost of Living Revisited: Causes and Consequences”, Bank Negara Malaysia. 2021, Annual Report. https://www.bnm.gov.my/documents/20124/6458991/ ar2021_en_wb1.pdf 16 COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 FIGURE 30 FIGURE 31 Firms affected by price controls Firms affected by price controls and the degree of impact Products/services currently subject to price controls Impact of price controls Share of firms (%) Share of a ected firms (%) 49 51 100 50 12 Severe – negative cash flow as price is set below costs 40 80 Neutral – no impact Mild – lower profit margin 37 30 60 20 40 51 10 20 0 0 Yes No Most firms in agriculture and manufacturing are subjected to price controls and small firms bear asymmetric costs of price control with less ability to pivot away from price controls compared to large firms. The agricultural sector has the most firms facing price controls with 70% of firms being subjected to it, followed by the manufacturing sector at 60% (Figure 32). Additionally, small firms tend to accept the outcomes of price controls as they are less capable to substitute current products in the short run (Figure 33). Substituting current products is a prevalent strategy adopted by 48% of medium firms and 51% of large firms as seen in Figure 33. Despite being beneficial to targeted consumers, the burden of price controls falls disproportionately on smaller firms further informing the Central Bank’s argument that price controls can squeeze the margin of firms along the supply chain that have less market power5. FIGURE 32 FIGURE 33 Firms affected by price controls by broad sectors Plan to deal with price controls, by firm size Products/services currently subject to price controls by sector Plan to deal with price controls Share of firms (%) Share of a ected firms (%) 80 51 50 48 70 43 42 60 60 40 37 36 34 32 32 46 30 40 34 22 22 20 19 17 20 11 11 10 8 9 6 0 0 Small Medium Large Agriculture Manufacturing Services Construction Substitute current products Exit market temporaily Accept Increase production Reduce production Close permanently Note: Calculated only out of firms that have their products subjected to price controls. 5 Refer to Diagram 2 for a schematic explanation of firms with low market power have their profit margin squeeze as in “Cost of Living Revisited: Causes and Consequences”, Bank Negara Malaysia. 2021, Annual Report. https://www.bnm.gov.my/documents/20124/6458991/ar2021_en_wb1.pdf. COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 17 Resilient Supply Chain Rising awareness about firms’ supply chain resilience and preparedness to face disasters has become increasingly important. The survey found that some major export sectors were less engaged in resilient supply chain planning than expected although the majority of firms in various sectors practiced resilient supply chain planning. Overall, 67% of Malaysian firms are engaged in resilient supply chain planning, with the utilities sector at the highest (87% of firms), while firms under other commerce activities are at the lowest (51% of firms). Electronics is the second lowest sector (Figure 34) that engages in resilient supply chain planning (62% of firms), despite being a major export sector in Malaysia, in contrast to the automotive sector (81% of firms). FIGURE 34 Resilience supply chain planning, by firm size Engagement in resilient supply chain planning Share of firms (%) 87 81 83 78 80 80 64 65 67 62 64 60 51 40 20 0 Other Commerce Electronics (food & beverage) Commerce Other Services Biz Services Fin./Real Estate/ Agriculture & Mining Other Manufacturing Construction Automotive Transportation Tourism & Utilities There is variation across sectors that are exposed to Area Business Continuity (ABC)6 practices. The electronics sector (at 57% of firms) is one of least exposed to ABC practices, in contrast with the automotive sector with the highest share of firms at 81%, despite both sectors being deeply integrated within the global value chains (Figure 35). Moreover, the Other Central region7 is the epicenter of the December 2021 floods that nationally incurred RM6.1 billion in losses8 and 54 deaths9 has only 57% of firms exposed to the practice of ABC, compared to the Southern region of 71% (Figure 36). 6 Area Business Continuity is a coordinated plan among tenants in an industrial/commercial area to pool and mobilize resources in a coordinated manner with authorities to avoid or mitigate risk from a disaster and resume operations as soon as possible should the disaster becomes unavoidable. 7 Epicenter of the flood is State of Selangor, but the Other Central region grouping here includes Negeri Sembilan. 8 Department of Statistics, “Special Report on Impact of Floods in Malaysia 2021”, January 28, 2022, Putrajaya. 9 The Malay Mail, “Malaysia suffered estimated flood losses of up to RM6.5b, says Minister”. Jan 17, 2022. https://www.malaymail.com/news/malaysia/2022/01/17/ malaysia-suffered-estimated-flood-losses-of-up-to-rm6.5b-says-minister/2035632. 18 COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 FIGURE 35 FIGURE 36 Area Business Continuity by sector Area Business Continuity by region Area Business Continuity Area Business Continuity Share of firms (%) Share of firms (%) 81 80 77 78 71 80 75 66 70 61 64 60 63 57 60 57 57 51 60 54 42 40 40 20 20 0 0 Other Commerce Commerce (food & beverage) Electronics Other Services Tourism & Transportation Fin./Real Estate/Biz Services Agriculture & Mining Other Manufacturing Utilities Construction Automotive East Malaysia Other Central Eastern Northern Cyberjaya Kuala Lumpur/Putrajaya/ Southern Environment Rising demand for green competitiveness in global markets means Malaysian firms, like any other export- driven economy, need to adapt to new standards of environmental protection. The majority of firms are aware of the Environmental, Social and Governance standards (ESG) as well as the Government’s carbon neutrality goals. Additionally, the majority of firms are also planning to invest in improving energy efficiency in the next 12 months. The majority of the firms are aware of and are willing to adopt ESG standards. 67% of all firms are aware of the ESG standards, of which, 80% are willing to adopt ESG standards (Figure 37). FIGURE 37 Firms’ response to ESG awareness and willingness to adopt ESG standards Unaware of ESG Willing to 23% adopt ESG Aware of ESG Unsure 67% about adopting 80% 8% Unwilling to adopt Don’t know 10% 12% COVID-19 BUSINESS PULSE SURVEYS Firms’ Recovery from COVID-19 in Malaysia ROUND 5 August 2022 19 Increased financial costs is the main obstacle for firms to adopt better environmental standards. 42% of firms cited increased financial cost as a major constraint, while the second most common obstacle is the lack of incentives (at 35% of all firms) [Figure 38]. The majority of firms are aware of the Government’s carbon neutrality commitments but a significant portion of small firms are unaware. 63% of firms are aware of the carbon neutrality goal set by the Government. However, significantly fewer small firms (43% of them) are aware of it compared to medium-sized and large- sized firms, both at over 70% of firms respectively. Meanwhile, 50% of firms ranked the need for clear rules and regulations (ahead of tax incentives) as the top choice of policy support to enable transition towards carbon neutrality and better environmental standards (Figure 39). FIGURE 38 FIGURE 39 Obstacles for firms to adopt better Support needed for carbon neutrality environmental standards transitions Obstacles to better environmental standards Obstacles to better environmental standards Share of firms (%) Share of firms (%) 42 50 50 Increase financial costs Clear rules and regulations 46 46 45 40 Lack of incentives Tax incentives 35 Unclear rules from Government Government procurement 33 33 32 Lack of expertise within firm 40 Technical assistance 31 Lack of technical information Grants 30 30 28 Prioritizing business survival Soft loans 32 Lack of Government support 30 Unable to secure funding 30 20 20 10 10 0 0 Finally, the majority of firms (56% of firms) have energy efficiency plans. Going forward, 60% of firms expect to invest in improving their overall energy efficiency in the next 12 months.