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       AS the last quarter of the year rolls in, hope for a firmer recovery seems within reach. More states are progressing through the phases under the National Recovery Plan and more businesses are allowed to operate at greater capacity.

       With high vaccination rates and the easing of movement restrictions, companies are hopeful that consumer support will return.

       Correspondingly, findings in the recent RAM Business Confidence Index (BCI) survey for the third quarter (Q3) of 2021 showed that sentiment among local SMEs has improved significantly from Q2 amid the relaxation of restrictions and the reopening of the economy.

       The survey saw the overall confidence index recover to 41.4 points in Q3 from 33.2 points in the preceding quarter. The improvement in the index was led by increases in the sales and profitability sub-indices, which rose to 45.9 (+21.0 points) and 37.0 (+13.9 points), respectively.

       More than 75% of the firms polled said they are currently open for business, of which around 42% recently reopened amid the relaxation of controls.

       Encouragingly, around 33% and 23% of respondents expect their sales and profits, respectively, to rise in the next three months, up from 11% and 10% in the Q2 2021 survey.

       Nonetheless, RAM Holdings Bhd (RAM Ratings) notes that the overall index and its five measured sub-indices are still below 50 points – the threshold of the optimistic level.

       The survey, carried out by RAM Ratings in early September, polled 78 firms that were chiefly SMEs and micro enterprises.

       While the findings bode well for businesses at large, the rating agency emphasises that firms are not out of the woods yet as they continue to face the lingering effects of the pandemic along with other emerging challenges.

       About 81% of the respondents cited the sluggish economy as their biggest challenge, followed by the rising cost of doing business at 66% – higher than 59% in Q2. The increase in respondents worried about rising costs coincides with the current uptrend in global commodity prices.

       Interestingly, RAM Ratings says firms surveyed in Q3 also appear to be more concerned about competition and challenges arising from supply chain issues.

       “Greater competition (40%) and supply chain issues (37%) are also more prevalent concerns among firms surveyed this quarter. The share of firms citing the two challenges was about 12 percentage points higher, respectively, compared to the previous quarter,” it says.

       Notably, customers have moved online during the pandemic and companies have started using e-commerce to widen their reach. While the move online has helped many SMEs, observers note that small businesses may find the e-commerce race challenging as consumers seek out more notable brands.

       “People say the pandemic is like a leveller, but it’s not. It actually makes the bigger companies better and the smaller companies worse.

       “For example, for a bigger brand that has 100 outlets, consumers know you and there’s a natural demand wanting to search out and buy your products, whether on e-commerce platforms or their own apps. So there’s actually consumers searching for them whether their stores are open or not.

       “On the other hand, smaller brands are hit from all angles. They have no leverage when negotiating supplies and they don’t have that brand element to get consumers to search for them. So they are very reliant on the locals,” says an e-commerce platform operator.

       Over the course of the year, regular customers may have, possibly, discovered other brands and products, which would make it a challenge for SMEs moving forward if they cannot or do not innovate their products and services.

       Additionally, many companies had also pivoted their offerings during the pandemic to remain open or to stay afloat. This may mean that as the economy reopens, there would be more players in particular segments – especially for essential products and services – thereby increasing competition in the sector.

       Moving ahead, SMEs say surviving the current crisis remains their primary concern. According to the RAM BCI survey, 59% of respondents cited surviving and staying afloat as their current priority.

       About 17% of firms surveyed have made building cash buffers their focus, likely to replenish reserves drawn down throughout the pandemic to cushion still elevated downside economic risks.

       Others note expanding their offerings and building up production capacity as a priority.

       While the relaxation of restrictions and reopening of most sectors will help the country’s, and businesses’, recovery efforts, RAM Ratings opines that SMEs are still in need of continued financial aid and support as uncertainties over the containment of new waves of infection remain, moving into next year.

       RAM Ratings says the survey results indicate that firms in the sample came under greater business and financial pressure during the third movement control order (MCO) period. Some 56% of surveyed firms said they saw larger financial losses in MCO 3.0 compared to MCO 1.0.

       On the flipside, only 27% of respondents said their losses were smaller this time around, while 17% said the impact was similar for both.

       “We applaud the various stimulus packages for small businesses but urge policymakers to continue direct and indirect support measures to facilitate the recovery and ensure the long-term survival of these firms.

       “As business and economic conditions have yet to normalise, it is no surprise that the vast majority of firms have voiced the need for continued direct government financial support. Close to 70% of firms said they will need more direct financial support from the government this year and next,” says the rating agency.

       It adds that 75% of firms hoped for another round of stimulus with further assistance in the form of loan moratoriums, wage subsidies, grants and other business subsidies.

       The next most cited assistance are loan or financing facilities, which around 21% of surveyed firms suggested.

       “These two forms of aid would help address immediate operational challenges and cashflow needs that have plagued businesses since the start of the pandemic,” says RAM Ratings.

       Earlier this week, Bank Negara said banks have continued to support financing for viable SMEs. During the first half of 2021, more than a quarter of approved SME loans went to first-time borrowers, while approved loans to new SMEs accounted for almost 20% of the total volume of SME loans approved.

       This, says the central bank, has helped to sustain business activity, particularly as businesses seek to pivot their operations or pursue new business opportunities in response to the immediate and foreseeable longer-term impacts of the pandemic.

       “Overall outstanding SME loans grew by 6% (in the first half, December 2020: 9.6%), with approval rates for SME loans improving to 77.3% (December 2020: 73.3%, five-year average: 82.8%),” it says.

       Financing for investment-related activities, which will expand the productive capacity of SMEs, continued to grow albeit at a more moderate pace (June 2021: 2.4%, December 2020: 7.6%). Meanwhile, financing for working capital increased by 9.2% (December 2020: 12.3%), driven primarily by the consumer-facing sectors such as wholesale and retail, hotels and restaurants, and transportation sectors which continued to face headwinds in the challenging environment.

       Bank Negara also notes that the overall proportion of SME loans under repayment assistance increased to 21.6% of total SME loans in June 2021 although the share of loans that have significantly increased credit risks was lower at 14.6%.

       “Banks also continued to lend to viable SMEs, while various financing guarantee schemes remain available to complement direct bank lending to these segments,” it adds.