COVID-19 BUSINESS PULSE SURVEYS ROUND 3 July 2021 Impacts of COVID-19 on firms in Malaysia Results from the 3rd Round of COVID-19 Business Pulse Survey Smita Kuriakose Finance, Competitiveness and Trang Tran Innovation Global Practice Kok Onn Ting Sarah Hebous 2 COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 Acknowledgements This brief was prepared by Smita Kuriakose (Senior Economist), Trang Tran (Senior Economist), Kok Onn Ting (Private Sector Specialist) and Sarah Hebous (Consultant). The survey instrument was customized for Malaysia by Smita Kuriakose and Trang Tran with inputs from Kok Onn Ting, Antoine Coste, Kristina Fong and Alyssia Maluda. 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), Denis Medvedev (Practice Manager, FCI) and Yasuhiko Matsuda (Country Manager, Malaysia). For more information, please contact Smita Kuriakose (skuriakose@worldbank.org) COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 3 Key findings • The survey in July 2021 reveals another difficult period for firms in Malaysia. • Tightening of lockdown measures increased business closures and worsened firms operating below capacity situation. • Both sales and employment remain depressed: average monthly sales growth in July 2021 was 18% lower than the pre-pandemic level and net employment is 15% lower on average. » Interms of sales: Construction sector fares badly compared to other sectors, with Electronics and Agriculture & Mining showing signs of rebound. Small firms and non- exporters continue to be hardest hit. » In terms of employment: Large firms have started to rebound from the severe drop in average employment in Round 2 survey while SMEs widened their losses in July 2021. • The majority of firms, both exporters and non-exporters, face acute demand shortages. Supply chain problems have eased for exporters, but a higher share of non- exporters reported supply chain difficulties. • Average firms’ liquidity is largely at similar levels but the share of firms with severe cash flow shortages has increased. Share of firms with less than one month cash available, increased from 31% in Jan/Feb 2021 to 38% in July 2021. Automotive firms have the lowest average cash flow and firms in non-food wholesale/retail sector have the highest likelihood of falling into arrears. • Firm’s margins of adjustments may be narrowing. A non-negligible share of firms have considered moving out of Malaysia due to lockdown measures and operational restrictions. Firms are increasingly less likely to adjust employment or reduce product and input prices. The share of firms using certain management practices in sales, marketing, and staff promotion fell during COVID-19, despite the fact that firms that do use management practices perform significantly better in terms of sales. • Digitalization remains a major adjustment strategy by firms. However, most of digital adjustments are driven by existing users which increased at the onset of the pandemic. Further, evidence suggests digital solutions may have translated into less significant changes in business models for smaller firms. • On the policy front, access to government assistance remains high at 85% compared to 90% in Round 2, however, access by small size firms has dropped to 72% against 92% for medium and large firms. As small size firms are impacted more by the lockdown and have less cash flow buffers, this raises questions on targeting. • Evidence shows that hiring incentives are working: The correlation test found that the probability of an employer hiring new workers is about 10% higher for those receiving MyFuture Jobs incentives under the PEMULIH stimulus package. • The share of firms having low confidence in the Government’s handling of the pandemic rose due to the perception that the Government was not able to improve clarity and predictability of SOPs. Additionally, sentiments that disbursement of stimulus package loans is deteriorating has gradually increased between Jan/ Feb 2021 and July 2021. 4 COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 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 3 rd round of survey in July 2021, following the 1st round in October 2020 and 2nd round of the Malaysia BPS in Mid-January to February 2021. 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 National Recovery Plan (exit strategy) Against the backdrop of rapidly rising COVID-19 cases in the country (Figure 1), Malaysia reimposed a third Movement Control Order (MCO) on May 12, 2021, before upgrading it to a Full Movement Control Order (FMCO) in June 2021. The Government then introduced the National Recovery Plan on June 15, 2021, with various phases to replace the previous terminology for stages of lockdown and set parameters for the FIGURE 1 Rapid and steep rise in new daily cases of COVID-19 in July 2021 during the implementation of Round 3 0 Weighted average in Google Mobility trends 80 -20 New cases (% of peak) 60 (baseline=0) -40 40 -60 20 -80 0 01/2020 07/2020 01/2021 07/2021 Round 1 (Oct 1–15, 2020) Round 2 (Jan 15–Feb 10, 2021) Round 3 (Jul 8–28, 2021) Weighted average in Google Mobility trends New cases (% of peak) Weighted average is constructed using 30-day periods of Google mobility around transit stations, retail, groceries and workplaces. Weight of past 30 days is equal to 1, weight of period 2 (days 31-60) is equal to 1/2, so on and so forth. Source: Google Mobility and Center for Systems Science and Engineering (CSSE) at Johns Hopkins University 1 Due to lack of statistics about the true universe of firm, all analyses are done without weights. COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 5 Timeline of Various Stages of Movement Control Order Terminology Period Movement Control Order (MCO) 18 March – 12 May 2020 Conditional Movement Control Order (CMCO) 13 May – 9 June 2020 10 June 2020 to 31 August, then extended to 31 Recovery Movement Control Order (RMCO) December 2020. 2nd CMCO 14 Oct – 7 Dec 2021*  2nd MCO 13 Jan – 4 Mar 2021  Conditional Movement Control Order (CMCO) 5 March 2021 onwards 3rd MCO 12 May – 28 June 2021 (upgraded to Full MCO on 1 June) National Recovery Plan announced on 15 June with Most of the lockdown measures remain in place Phase 1 (most restrictive) to Phase 4 (least restrictive) during the Round 3 survey even though 8 states enter replaced the previous terminology of MCO. Phase 2 of the NRP. Note: Dates above provided as guides due to various states reverting to different phases under the National Recovery Plan in various stages. national exit plan. Despite the FMCO, the authorities allowed certain sectors of the economy to operate at lower capacity. Cross-border entry into Malaysia remains largely restricted. The number of daily cases in July 2021 climbed from 6,988 cases on July 1 to 17,786 cases on July 31, which was at a level never seen before. 2 The Government of Malaysia introduced the PEMERKASA+ in May 2021 and PEMULIH in June 2021 as economic stimulus package to provide support to households and firms affected by the crisis. The third survey was implemented more than a month into the re-imposition of Movement Control Order (MCO) in June 2021, widely cited as MCO 3.0. At the time of writing, different states have reverted to various phases that are less restrictive categories under the National Recovery Plan, but the interstate travel ban remains, nevertheless. Impact on Firms Further tightening of lockdown measures increased business closures and worsened sales losses. Furthermore, firms that remained in operation reported higher loss of operating hours in Round 3 compared to the same time last year. Operational Status The operational status of firms worsened as compared to the results in Round 2, with the share of firms mandated to be temporarily closed being higher than that in Round 2. The share of firms mandated to close increased from 12% in Round 2 to 19% in Round 3 (refer to Figure 2). However, these rates are below the levels 2 Note that these cases have since decreased and Malaysia has recorded one of the highest vaccination rates in the region due to the increased efforts in July- August 2021. 6 COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 of the first lockdown in March 2020. The average change in the hours of operation relative to the same time in 2020 saw a drastic decrease of 22% as shown in Figure 3. FIGURE 2 FIGURE 3 Firms operational status worsened with a For firms that remained open, there was an decline in firms that were allowed to operate decline in the hours of operation Operational Status Average change in hours of operation relative to same time last year Share of firms (%) (%) 62 0 60 57 57 59 56 52 49 -5 40 38 31 31 29 27 -10 -9 19 20 18 18 16 16 13 12 -14 8 6 -15 4 2 2 2 3 3 3 1 1 2 1 2 0 Open Partially Temp. Temp. Permanently open closed closed closed (mandated) (own choice) -20 MCO (Mar–Apr 2020) R2 Jan 15–Feb 10, 2021 1st CMCO (May–Aug 2020) 3rd CMCO (Feb 10–May 31, 2021) -22 R1 Oct 1−15 2020 R3 Jul 8–28, 2021 2nd CMCO (Oct 14–Dec 7, 2020) Oct 1–15, 2020 Jan 15–Feb 10, 2021 Jul 8–28, 2021 Based on disaggregated data, there are significantly higher rates of closure and more disruptions affecting small firms compared to medium and large size firms. Likewise, firms located in the southern region reported a higher share of firms that were closed in July 2021 compared to firms located in other regions. At the sectoral level, the construction sector is the most affected sector during the MCO 3.0 in July 2021 with the least share of firms that are open at full or below capacity. Health concerns of staff and customers and the lack of demand are the top reasons for business closures. 25% of firms surveyed reported health mandated closures as being the reason to close their business and 21% of firms cited lack of demand as the reason for closure. This is reflective of the broader health situation with multiple record high new daily COVID-19 cases in July 2021, reaching 20,000 cases per day in mid-August 2021. Impact on Sales Signs of recovery seen in October 2020 have petered out as seen by the findings in Round 2 (Jan 15-Feb 28, 2021) and Round 3 (July 2021) based on the impact on firms’ sales. Based on Figure 4, almost a similar share of firms reported a decrease in sales for Round 2 at 52% and Round 3 at 53%. The average reduction in sales relative to the same period pre-COVID was 18% during the implementation of Round 3. This is slightly better than the sales reduction of 22% seen during the 3 rd CMCO period (Feb 10- May 31, 2021) as shown in Figure 5. The decline in firm sales continues to be more severe for small firms and non-exporters through the different phases of the pandemic (refer to Figure 6). There is a slight rebound in sales growth in July 2021 compared to CMCO 3.0 (Feb 10- May 31, 2021) in all broad sectors, with the fastest recovery in Agriculture and Mining (as shown in Figure 7). Conversely, firms in the Construction sector continue to suffer the sharpest decline in sales relative to the pre-COVID-19 period. COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 7 FIGURE 4 FIGURE 5 Majority of firms experiencing decrease in sales Average sales declined compared to same during R2 (Jan/Feb 2021) and R3 (July 2021) period pre-COVID-19 as opposed to R1 (Oct 2020), when more firms indicated their sales were unchanged Change in sales relative to same period pre-COVID-19 Average change in sales relative to same period pre-COVID-19 Share of Firms (%) (%) 80 0 67 64 -5 60 57 52 53 -8 44 -10 40 41 39 40 34 33 -12 32 26 -15 26 -16 20 20 15 14 15 -18 10 -20 10 7 -22 -22 0 -25 Increase Remain about the same Decrease -26 MCO (Mar–Apr 2020) R2 Jan 15–Feb 10, 2021 MCO (Mar–Apr 2020) R2 Jan 15–Feb 10, 2021 1st CMCO (May–Aug 2020) 3rd CMCO (Feb 10–May 31, 2021) 1st CMCO (May–Aug 2020) 3rd CMCO (Feb 10–May 31, 2021) R1 Oct 1−15 2020 R3 Jul 8–28, 2021 R1 Oct 1−15 2020 R3 Jul 8–28, 2021 2nd CMCO (Oct 14–Dec 7, 2020) 2nd CMCO (Oct 14–Dec 7, 2020) FIGURE 6 FIGURE 7 Small firms suffer a greater decline in sales Sales in agriculture and mining sector relative to the pre-COVID-19 period compared experienced a rebound in July 2021 but to medium and large firms construction sector suffers deep sales decline Change in sales relative to same period pre-COVID-19 Change in sales relative to same period pre-COVID-19 (%) (%) (Feb 10−May 31, 2021) (Feb 10−May 31, 2021) (Oct 14−Dec 7, 2020) (Oct 14−Dec 7, 2020) Jan 15−Feb 10, 2021 Jan 15−Feb 10, 2021 (May−Aug 2020) (May−Aug 2020) (Mar−Apr 2020) (Mar−Apr 2020) Oct 1−15, 2020 Oct 1−15, 2020 Jul 8−28, 2021 Jul 8−28, 2021 2nd CMCO 2nd CMCO 3rd CMCO 3rd CMCO 1st CMCO 1st CMCO MCO MCO R2 R2 R3 R3 R1 R1 0 0 -10 -10 -20 -20 -30 -30 -40 -40 Agriculture & Mining Construction Small Medium Large Manufacturing Services Employment shocks Employment remains depressed, driven by losses in employment by SMEs. On average, net employment extends its downward trend from Round 1 to Round 3 with average employment in July 2021 at 15% lower than the pre-pandemic baseline as in Figure 8. This trend was driven by SMEs, who continue to suffer increasing losses in employment in July 2021. Large firms, that suffered the biggest drop in employment in the last 8 COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 survey have reversed this trend. The average drop in employment in July 2021 for large firms is significantly lower than in Jan 2021 (-19% in Round 3 compared to -27% in Round 2), compared to small firms (-19% in Round 3 compared to -10% in Round 2) and medium sized firms (-18% in Round 3 compared to -14% in Round 2) as shown in Figure 9. FIGURE 8 FIGURE 9 Change in employment remained depressed in Loss of employment among small firms increased July 2021 in July compared to Jan/Feb, while the large firms narrowed their loss of employment in July compared to the Jan/Feb period Average change in employment compared to pre-pandemic Average change in employment compared to pre-pandemic (March, 2020) (%) (March, 2020) (%) Oct 1−15, 2020 Jan 15−Feb 10, 2021 Jul 8−28, 2021 -5 -15 -10 Small -19 -10 -6 -14 Medium -18 -11 -15 -27 Large -19 -20 −30 −20 −10 0 Controlling for firm size, sector, and exporter status. Oct 1–15, 2020 Jan 15–Feb 10, 2021 Jul 8–28, 2021 Employment adjustments have become more subdued over time. While firms with larger sales losses are more likely to reduce employment, this relationship has become significantly weaker over time, moving from Round 1 to Round 3 (refer to Figure 10). One potential explanation is that firms are unable to continue reducing employment further. FIGURE 10 The relationship between change in employment and change in sales becoming weaker over time Change in sales vs. change in employment 10 Average change in employment 0 -10 -20 -30 -40 -100 -50 0 50 100 Change in sales relative to same period pre-COVID-19 Oct 1–15, 2020 Jan 15–Feb 10, 2021 Jul 8–28, 2021 COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 9 Demand and Supply shocks Firms are facing an acute decrease in demand. Compared to a year ago, where firms were already affected by the 1st CMCO, about half of the firms are experiencing demand difficulties due to shortages of new orders and customers in July 2021, while about another quarter reported cancelations of existing orders as the most important demand issue. Overall, supply side shocks did not deteriorate further as there are no significant differences between Round 3 and Round 2 in terms of firms reporting difficulty in fulfilling orders. However more non-exporters reported facing supply disruptions while the situation for exporters is easing. Based on Figure 11, non-exporters facing supply chain disruptions increased from 68% to 74%, while they eased for exporters with disruptions decreasing from 80% to 75%. As seen in the previous rounds, the majority of non-exporters did not change their strategy while majority of exporters adopted a more dynamic strategy to find more suppliers (Figure 12). FIGURE 11 FIGURE 12 Difficulty in fulfilling sales orders due to Majority of non-exporters adopt ‘no change’ disruptions are easing for exporters, while strategy, while exporters look for more suppliers increasing for non-exporters to deal with the supply chain challenges Di culty fulfilling sales orders due to disruptions, delays or issues Dealing with supply chain challenges with suppliers or supply chain Share of firms (%) Share of firms (%) Exporter Non-Exporter 80 80 80 60 74 75 55 52 68 4950 48 47 63 41 60 40 3737 30 31 31 31 28 25 26 2625 24 24 22 21 21 40 20 16 16 16 13 14 9 10 20 0 No change More suppliers (local) More suppliers (foreign) In-house production Larger inventory No change More suppliers (local) More suppliers (foreign) In-house production Larger inventory 0 Non-Exporter Exporter Oct 1–15, 2020 Jan 15–Feb 10, 2021 Jul 8–28, 2021 Oct 1–15, 2020 Jan 15–Feb 10, 2021 Jul 8–28, 2021 Supply chain disruptions hits ‘Other Commerce’ and construction sectors the hardest in July 2021. Based on Figure 13, Other Commerce sector has the highest share of firms reporting difficulty in fulfilling orders and the highest proportion of monthly sales being affected by canceled orders at 49%. Likewise, 82% of firms in the Construction sector reported difficulty in fulfilling orders and about 46% of firms’ monthly sales are affected by canceled orders. The Tourism & Transportation sector has the least firms reporting facing disruptions in Round 3 (possibly due to the fact that the sector has been at a low baseline since early 2021). However, its firms’ monthly sales affected by cancellations are at 48% (refer to Figure 14). 10 COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 FIGURE 13 FIGURE 14 More firms in Other Commerce and Other Commerce, Tourism and Transportation Construction subsectors faced challenges are subsectors most affected by cancelled in fulfilling orders orders Di culty fulfilling sales orders due to disruptions, delays or issues Share of monthly sales a ected by with suppliers or supply chain cancelled orders (%) Share of firms (%) 67 31 Tourism & Transportation 77 Electronics 34 64 33 62 26 Automotive 72 Automotive 36 65 35 70 31 Agriculture & Mining 79 Utilities 33 67 35 68 32 Other Services 70 Other Manufacturing 34 69 37 77 36 Commerce (Food & Beverage) 70 Agriculture & Mining 38 72 38 79 36 Fin./Real Estate/Biz Services 80 Commerce (Food & Beverage) 41 73 40 77 46 Utilities 76 Construction 37 78 46 76 32 Electronics 82 Fin./Real Estate/Biz Services 39 79 46 80 40 Construction 76 Other Services 41 82 48 71 44 Other Manufacturing 65 Tourism & Transportation 46 83 48 66 38 Other Commerce 70 Other Commerce 42 86 49 0 20 40 60 80 0 10 20 30 40 50 Oct 1–15, 2020 Jan 15–Feb 10, 2021 Jul 8–28, 2021 Oct 1–15, 2020 Jan 15–Feb 10, 2021 Jul 8–28, 2021 Financial shocks Cash flow has not worsened significantly on average, but the proportion of firms with severe liquidity shortages has increased. Firm’s average cash flow and their risk of falling into arrears have not changed significantly between Oct 2020, Jan/Feb 2021 and Jul 2021 (Figure 15 and Figure 16). However, the share of firms having less than one month of cash available increased from 31% in Jan/Feb 2021 to 38% in Jul 2021. Likewise, the share of firms that were already in arrears also increased by 4 percentage points from Jan/Feb 2021. Moreover, close to 70% of firms reported having customers that are at least three months behind in payments. FIGURE 15 FIGURE 16 Firms with less than one month of cash flow and Average time until cash flow shortage remains those falling into arrears are increasing broadly unchanged Financial shocks Time until expected cash flow shortage Share of firms (%) Number of weeks 79 79 19.93 20.16 80 75 20 19.61 69 63 59 59 60 15 38 39 40 37 35 31 29 28 10 24 8.00 8.00 8.00 23 20 5 0 Less than Less than Adjusted loan Fell in Expect to Customers one month six months terms or arrears fall in at least of cash of cash schedule arrears three months 0 available available behind in payments Average Median Oct 1–15, 2020 Jan 15–Feb 10, 2021 Jul 8–28, 2021 Oct 1–15, 2020 Jan 15–Feb 10, 2021 Jul 8–28, 2021 COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 11 SMEs are more liquidity constrained while large firms’ cash flow has improved. Although cash buffers remain constant at 20 weeks, the average time until cash flow shortage (with external financing) for firms has been declining from 21 weeks in Oct 2020 to 16 weeks in July 2021. As a result, the total average time until cash flow shortage affects firms now declined from 41 weeks in Oct 2020 to 36 weeks in July 2021 (Figure 17). Large firms have improved their cash flow buffers significantly, with the component “without external finance” rising from 25 weeks to 32 weeks, while medium firms average time until cash flow shortage declined from 19 weeks in Round 2 to 15 weeks in Round 3, while small firms remain constant at 15 weeks (Figure 18). FIGURE 17 FIGURE 18 Although cash buffers remain constant, average Large firms notably increased cash flow buffers, cash flow for firms with external finance while small and medium firms face declining declined from 21 weeks to 16 weeks cash buffers Average time until cash flow shortage Average time until cash flow shortage Number of weeks Number of weeks 21 28 19 40 19 50 24 16 40 30 17 16 15 17 32 15 30 14 20 20 20 25 25 20 20 19 17 16 15 15 15 10 10 0 0 Small Medium Large Small Medium Large Small Medium Large Oct 1−15, 2020 Jan 15−Feb 10, 2021 Jul 8−28, 2021 Oct 1−15, 2020 Jan 15−Feb 10, 2021 Jul 8−28, 2021 Without access With access Without access With access to external finance to external finance to external finance to external finance FIGURE 19 FIGURE 20 Automotive sector has the lowest cash flow Other Commerce sector has the highest self- buffer compared to other subsectors reported risk of falling into arrears Predicted time until cashflow shortages (with external finance) Predicted likelihood of falling in arrears in the next 6 months (Weeks) (Probability) Other Services Other Services Fin./Real Estate/Biz Services Fin./Real Estate/Biz Services Tourism & Transportation Tourism & Transportation Other Commerce Other Commerce Commerce (Food & Beverage) Commerce (Food & Beverage) Construction Construction Utilities Utilities Other Manufacturing Other Manufacturing Automotive Automotive Electronics Electronics Agriculture & Mining Agriculture & Mining 0 10 20 30 40 50 0.2 0.3 0.4 0.5 0.6 Regression includes size, exporter, region FE Regression includes size, exporter, region FE 12 COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 Automotive firms have the lowest average cash flow and firms in Other Commerce sector have the highest likelihood of falling into arrears amongst all sectors. The Automotive sector has the lowest average cash flow in July 2021 (with or without external financing) as shown in Figure 19. Further, it also has the highest share of firms with less than 3 months of cash flow. Meanwhile, self-reported risk of falling in arrears is highest for Other Commerce sector (refer to Figure 20). Main financial constraints for medium and large firms are having too many outstanding loans while small firms still face procedural barriers. The most important barriers to accessing finance for firms are ‘the fear of repayment risk’, ‘too many outstanding loans’ and ‘reduced supplier credit’. Majority of firms of all sizes especially medium to large firms named repayment risks in July 2021 as their main barrier to accessing finance as shown in Figure 21. Small firms have added difficulties with procedural problems such as ‘no collateral’ or ‘missing documentation.’ Interestingly, a higher share of large firms cite interest rates as being too high compared to small and medium firms as shown in Figure 22. FIGURE 21 FIGURE 22 Fear of repayment risk and ‘too many Small firms have added difficulties with outstanding’ loans are main reasons cited by procedural problems to access finance firms as barrier to financing Main di culties in accessing finance Main di culties in accessing finance Share of firms (%) Share of firms (%) 62 50 50 60 45 44 51 41 49 40 40 38 38 46 44 36 33 32 40 31 30 30 36 30 29 34 34 34 27 33 32 33 32 26 25 25 30 30 29 27 27 20 24 20 17 20 20 12 10 0 0 Interest No Too many Repayment Less Missing Banks Interest No Too many Repayment Less Missing Banks rates collateral outstanding risk supplier documentation non- rates collateral outstanding risk supplier documentation non- too high loans credit responsive too high loans credit responsive Oct 1–15, 2020 Jan 15–Feb 10, 2021 Jul 8–28, 2021 Oct 1–15, 2020 Jan 15–Feb 10, 2021 Jul 8–28, 2021 Expectations and Outlook Expectations vary, but the majority of firms expect the situation to remain the same in the next 3 months. The expected change in sales for the next 3 months did not differ significantly in July 2021 compared to Jan/ Feb 2021. Although there is a slight decline in the share of firms expecting either a decrease or an increase in sales, the majority of firms (53%) expect sales to remain the same. COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 13 Adjustments by Firms Firms’ use of different adjustment mechanisms remain similar to the previous round, with digital platforms continuing to be the most common strategy to deal with COVID-19. Almost all firms have adopted some strategy to deal with COVID-19. Increased use of digital platforms remains the most popular tool: In Jan/ Feb 2021: 57% of the firms surveyed increased the use of digital platforms and in July 2021 this was 52%. Conditional on firm characteristics, there are some significant decreases in the share of firms that have reduced output prices or input costs to adjust, consistent with tightening demand and domestic supply conditions in July 2021. Due to the lockdown measures and operational restrictions, a non-negligible share of firms has also considered moving operations out of Malaysia. Based on Figure 23, services subsectors such as Tourism & Transport, Utilities and Finance/Real Estate and Business Services are more likely to answer yes to ‘move operations out of Malaysia’ as an adjustment strategy in July 2021 followed by Other Manufacturing and Electronics. Large and medium firms are more likely to consider relocation than small firms. Relocation of large firms (refer to Figure 24) and manufacturing firms with extensive backward linkages can have larger impacts for employment and upstream sectors. FIGURE 23 FIGURE 24 Tourism & Transport, Utilities and Finance/Real Medium and large size firms are more likely to Estate and Business Services are more likely to move operations outside Malaysia move operations outside Malaysia Adjustments: Move out operations from Malaysia Adjustments: Move out operations from Malaysia Share of firms (%) Share of firms (%) 10 Other Commerce 8 10 6 Other Services 8 Small 13 Construction 9 7 12 Commerce (Food & Beverage) 11 20 Automotive 11 13 19 Agriculture & Mining 11 Medium 14 14 Electronics 12 9 Other Manufacturing 13 15 18 Fin./Real Estate/Biz Services 13 Large 5 Utilities 20 14 10 Tourism & Transportation 20 0 5 10 15 20 0 5 10 15 20 Jan 15–Feb 10, 2021 Jul 8–28, 2021 Jan 15–Feb 10, 2021 Jul 8–28, 2021 Number of firms who considered this adjustment: 180 (Round 2); 173 (Round 3) Number of firms who considered this adjustment: 180 (Round 2); 173 (Round 3) Operational difficulties are also reflected in the decreasing share of firms that use management practices since the start of the pandemic as shown in Figure 25. Sectors that are most affected such as Tourism & Transportation and small size firms are likely to decrease the use of management practices. However, correlation analysis shows that firms that use management practices suffer less in terms of sales decline, and this holds even more true since COVID-19 as shown in Figure 26. 14 COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 FIGURE 25 FIGURE 26 Share of firms using management practices Firms that continue to use management declined during the pandemic practices face a smaller magnitude of loss in sales Management practices Predicted change in sales (%) Share of firms (%) 60 57 10 51 50 45 0 40 -10 30 25 20 -20 20 14 -30 0 -40 Sales target Advertising Solely None (at least (at least performance-based 0 1 2 3 once/month) once/six months) promotion Pre-COVID-19 Since COVID-19 Number of management practices used (since COVID-19) Patterns of Digital Technology Adoption Increases in the use of different digital technologies in response to COVID-19 were driven by existing users across all four types of digital technologies surveyed (Figure 27). However, there are relatively few new adopters. The use of digital technologies for more complex back-end business functions (CRM, SCM, ERP) is lower at baseline and has also been slower to increase. FIGURE 27 Rise in the use of digital technologies is driven by increased use of digital technologies by existing users Use of digital technologies since COVID-19 Share of firms (%) 60 58 55 40 38 36 36 36 31 30 24 22 20 10 9 3 4 4 2 0 Digital platforms for sales Social media, data analytics CRM or SCM ERP software or payment solutions for marketing software Increased use New adopters Use not increased Never adopted COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 15 Both SMEs and large firms are increasingly using digital technologies intensively, but evidence suggests digital solutions may have translated into more significant changes in the business model for large firms. Large firms lead in terms of advanced digital adoption compared to small and medium firms. For example, for ERP software, an advanced function of digital technology, 15% of small firms compared to 49% of large firms has adopted ERP as shown in Figure 28. Large firms have higher online sales, and their share of online sales has increased faster since the pandemic as shown in Figure 29. FIGURE 28 FIGURE 29 Large firms lead in advanced digital adoption Share of online sales increased across firm sizes such as ERP software since the pandemic with large firms having a higher share of online sales as compared to SMEs Intensive use of digital technologies Share of online sales Share of firms (%) (%) 60 58 40 53 53 53 52 49 34 47 45 43 43 40 40 41 29 40 37 37 37 30 36 27 32 31 31 25 21 22 20 20 16 15 12 12 0 10 Small Medium Large Small Medium Large Small Medium Large Small Medium Large Digital platforms Social media, CRM or SCM ERP software 0 for sales or data analytics software payment solutions for marketing Small Medium Large Before COVID-19 After COVID-19 Before COVID-19 After COVID-19 Regulatory constraints faced by firms using digital platforms are digital privacy, consumer protection and the lack of digital financial services (refer to Figure 30). Top issues encountered by firms using digital platforms for marketing and sales are requirements of prices, such as offering the best price on the platform (35% of firms) and requirements set by platform (33% of firms) (see Figure 31). FIGURE 30 FIGURE 31 Digital privacy and lack of consumer protection Top issues encountered by firms in using are the main constraints for firms already using platform for marketing and sales are requirement digital platforms of prices and requirements set by platforms Regulatory barriers to increasing use of internet, Regulatory constraints in using platforms for marketing and sales social media and platforms Share of firms (%) Share among firms who started or increased use (%) 24 Digital privacy 24 Requirements on prices 35 23 Consumer protection 22 Requirements set by platform 33 20 Digital financial services 20 22 Cybersecurity 18 Restricted access to data 29 15 Supplier requirements 18 None 26 17 Taxation requirements 16 16 e-transactions regulations Changes in Terms & Conditions 25 14 15 Localization requirements 13 Suspension of account 21 10 Digital platform 12 11 Machine-generated data Lack of complaint mechanism 18 9 0 5 10 15 20 25 0 10 20 30 40 Jan 15–Feb 10, 2021 Jul 8–28, 2021 Jan 15–Feb 10, 2021 Jul 8–28, 2021 16 COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 Policy Support Access to government support in Malaysia decreased slightly in Round 3 but remains high, with 85% of Malaysian firms having access to some government support in July 2021 compared with 90% in Jan/Feb 2021. There is an upward trend on the need for new loans and a downward trend for payment deferrals (rent, mortgage payments, utility bills and credit payments), except in the construction sector. Although a vast majority of the firms continue to have accessed some form of government assistance, the gap between small firms (72%) and large (92%) and medium firms (92%) is wider than before in Jan/Feb 2021 (refer to Figure 32). This is a concern given that small firms have been more severely impacted by the lockdown and have less cash buffers relative to large firms. When analyzing the correlation between receiving government support and expected cashflow shortages, the relationship is weakly positive for small firms and if anything, negative for large firms – with the probability of getting support being slightly higher for firms with more cash buffer (Figure 33). Overall, this gap raises question about targeting of support programs. FIGURE 32 FIGURE 33 Small sized firms’ access to support programs Correlation between receiving government dropped in Round 3 support and expected cashflow shortages: The relationship is weakly positive for small firms Access to support policies Correlation between receiving government support and expected cash Share of firms (%) flow shortages 100 97 1 Received any government support (Round 3 survey) 96 93 94 92 92 80 80 80 0.9 72 60 0.8 40 0.7 20 0.6 −50 0 50 100 150 0 Time (weeks) until expected cashflow shortages (Round 3 survey) Small Medium Large Small Medium Large Oct 1–15, 2020 Jan 15–Feb 10, 2021 Jul 8–28, 2021 Conditional on sector, region FE A higher share of firms had access to programs that were maintained in the PEMERKASA+ and PEMULIH economic stimulus packages. However, a slight decline among top measures against Jan/Feb 2021 (EPF program, tax relief, wage subsidies) were recorded. Access to programs such digitalization grants have increase slightly from Jan/Feb 2021 as shown in Figure 34. The slightly lower rates of access in July 2021 may be driven partly by the more targeted approach of payment deferral programs. COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 17 FIGURE 34 Access to PEMERKASA+ and PEMULIH program is maintained with a slight decline in EPF program, tax relief, wage subsidies Access to support policies Share of firms (%) 32 EPF support 28 32 35 Electricity deferral or discount 26 30 27 Tax relief for COVID expenses 26 30 28 Wage subsidies 27 29 34 Loan payment deferral 25 28 26 e-CAP 24 25 23 Tax deferrals/rebates/exemptions 19 23 26 Rent deferral or reduction 19 20 Hiring Incentives 18 18 20 FA to implement social dist. 12 16 16 Subsidized loans 12 16 15 Digitization grants 15 18 17 Access to new credit 15 15 13 ICT acc. capital allowance 11 14 10 HRDF levy exemption 12 12 10 Acc. payment terms from GLCs 8 11 11 E-commerce training 10 8 9 Penjana Tourism Financing 9 8 0 10 20 30 40 Oct 1–15, 2020 Jan 15–Feb 10, 2021 Jul 8–28, 2021 Weaknesses in providing clarity and predictability of SOPs, which is rated as most sought-after policy improvements for businesses, leads to rising negative sentiments. The top ranked important policy implementation reform priorities for firms continue to be improving predictability of the SOP regulations (28% of firms) and expediting the disbursements for existing loans and grants under stimulus packages (20% of firms) (See Figure 35). FIGURE 35 Improving the SOPs remain the top policy improvement sought by firms Most beneficial government policy improvements Share of firms (%) 27 Clarity & predictability of SOPs 31 28 30 Expedite PERMERKASA+/PEMULIH 25 20 15 Simplify wage subsidy scheme 17 12 15 Increase use of e-Government 15 10 6 Expedite immigration approvals 6 6 6 Clarity on foreign labour policy 5 5 1 Others 1 1 0 10 20 30 Oct 1–15, 2020 Jan 15–Feb 10, 2021 Jul 8–28, 2021 18 COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 Concerns regarding improving clarity of SOPs are not being addressed by the government. In Round 3, only 27% of firms rated the roll out of SOPs as being improved (a decline from the 40% in Jan/Feb 2021). Correspondingly, the share of firms considering the situation being “worse than before” increased from 21% to 32% (refer to Figure 36). In addition, the share of firms that rated ‘very high’ and ‘quite high’ for confidence in the way government handled the pandemic dipped from 57% in Jan/Feb to 46% (less than half), while the share of firms that rated ‘very low’ increased from 11% to 24% as shown in Figure 37. It would be important to note that during the implementation of the survey, the cases were at a record high and the vaccination rates had only started to increase. FIGURE 36 FIGURE 37 More firms in the latest round feel that the Share of firms citing ‘very low’ confidence of implementation of SOPs has worsened the way the Government handled the pandemic is rising Rolling out of SOPs Confidence in the way the Malaysian Government is handling Share of firms (%) the COVID-19 pandemic Share of firms (%) 41 40 39 40 41 40 32 34 32 30 27 30 30 21 24 20 20 16 12 11 10 10 0 0 Improved Same as Worse than Very high Quite high Quite low Very low before before mid-March to mid-October 2020 vs. mid-October to mid-December 2020 mid-March to end-December 2020 vs. the 1st half of 2021 Jan 15–Feb 10, 2021 Jul 8–28, 2021 FIGURE 38 FIGURE 39 Increase in the share of firms rating Of those rated ‘worse than before’, attention disbursement of stimulus package loans as needs to be paid to small firms, and firms ‘worse than before’ located in Northern and Other Central and the Construction sector Disbursement of PERMERKASA+/PEMULIH loans Disbursement of PERMERKASA+/PEMULIH loans worse than before Share of firms (%) mid-March to end December 2020 vs. the 1st half of 2021 50 Agriculture & Mining 45 Electronics 40 Automotive 40 38 Other Manufacturing Utilities Construction 30 Commerce (Food & Beverage) 26 Other Commerce Tourism & Transportation 19 Fin./Real Estate/Biz Services 20 Other Services 13 Kuala Lumpur/Putrajaya/Cyberjaya 10 10 9 Other Central Northern Southern Eastern 0 East Malaysia Improved Same Worse Not sure/ Small as before than before Not applicable Medium mid-March to mid-October 2020 vs. mid-October to mid-December 2020 Large mid-March to end-December 2020 vs. the 1st half of 2021 0 10 20 30 40 COVID-19 BUSINESS PULSE SURVEYS Impacts of COVID-19 on Firms in Malaysia ROUND 3 July 2021 19 Additionally, there is an increase in the share of firms that rate the disbursement of stimulus packages loans as ‘worse than before’, increasing from 13% to 19% (Figure 38). Particular attention needs to be paid to small firms, and firms located in the Northern and Other Central region. At the sectoral level, Electronics, Other Manufacturing, and Construction are sectors that stand out (Figure 39). Continuous monitoring of business needs and potential impact of relief packages are needed to improve support implementation. There are some variations in support demand by sector. Payment deferrals and wage subsidies are typically considered for all broad sectors as the most needed support policies except for the Manufacturing sector, which selected wage subsidies and fiscal exemptions and tax reductions as top policy support. As alluded by the earlier part of the report, the Construction sector being one of the most affected sectors in July 2021, has a notable increase in the share of firms choosing payment deferrals as a much-needed policy support. Agriculture sector, Utilities, Tourism & Transportation are subsectors that need government assistance with health protocol support. Next Steps Continued monitoring of the situation is required to understand how firms in Malaysia are recovering from and adapting to the COVID-19 crisis. Implementation for Round 4 of the BPS is planned in November/ December 2021.