ECO531 BA2422C Group Assignment 2020 PDF

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MONETARY THEORY AND POLICY (ECO 531)GROUP ASSIGNMENT: REPORTTOPIC: THE EFFECT OF COVID-19 PANDEMIC ON SMALL AND MEDIUM-SIZEDENTERPRISES (SME)SUBMITTED BY:STUDENT NAME STUDENT ID GROUPEDRY LUQMAN AZMAN 2020483822BA2422CMOHD DANIEL BIN ZAINODIN 2020837358MUHAMMAD AZHAR BIN BAHRUDIN 2020659696MUHAMMAD ...

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MONETARY THEORY AND POLICY (ECO 531)

GROUP ASSIGNMENT: REPORT TOPIC: THE EFFECT OF COVID-19 PANDEMIC ON SMALL AND MEDIUM-SIZED ENTERPRISES (SME)

SUBMITTED BY: STUDENT NAME

STUDENT ID

EDRY LUQMAN AZMAN

2020483822

MOHD DANIEL BIN ZAINODIN

2020837358

MUHAMMAD AZHAR BIN BAHRUDIN

2020659696

MUHAMMAD AZRULL AMIN BIN ISMAIL

2020449534

MUHAMMAD SYAHIRUL SYAZWAN BIN ROZAINI

2020461678

PREPARED FOR: MADAM FAUZIANA BINTI FAUZI @ MAT RAWI SUBMISSION DATE: 15 JANUARY 2021

GROUP

BA2422C

THE EFFECT OF COVID-19 PANDEMIC ON SMALL AND MEDIUM-SIZED ENTERPRISES (SME)

PREPARED BY:

EDRY LUQMAN AZMAN

(2020483822)

MOHD DANIEL BIN ZAINODIN

(2020837358)

MUHAMMAD AZHAR BIN BAHRUDIN

(2020659696)

MUHAMMAD AZRULL AMIN BIN ISMAIL

(2020449534)

MUHAMMAD SYAHIRUL SYAZWAN BIN ROZAINI (2020461678)

JANUARY 2021

ABSTRACT The contribution and the role of small and medium enterprises (SMEs) to real economy is well appreciated and honourable, and great records is reported in the international literature. To identify and commercialize new market trend, prior knowledge and experience are needed with empirical evidence, entreprenuership in order to get close to the market. Especially, in turbulent times when opportunities are increasing, and where convex policies and strategies may work better for regulators and entrepreneurs. Nowadays, as COVID-19 moves from a public health pandemic to an economic crisis, it would be of great interest for entrepreneurs, employees, managers, and policy decisionmakers to identify major trends under and after COVID -19, forecast how SMEs in the globe will react, and where to spend our energies. Therefore, this report will focus on the effect of COVID-19 pandemic on SMEs in Malaysia on how they have been affected by identified the issues, giving the best recommendations and showing the predicted trend on how SMEs will survive within post Movement Control Order (MCO) in the period of COVID-19 pandemic. Keyword: SMEs, COVID-19, entreprenurs, role, effect, crisis,policy, Movement Control Order

ACKNOWLEDGEMENT First and foremost, praises and Alhamdulillah, thanks to Allah S.W.T, the Almighty, for His showers of blessing throughout we were managed to complete our group assignment that have been given by our lecturer within the time given successfully. This task had been done with all effort by our group members with all courage and passion that we have only for this task. We would like to express our deep and sincere gratitude to our lecturer, Madam Fauziana Binti Fauzi @ Mat Rawi because without her guidance, our report for group assignment cannot be done properly like this. She always gives us supports and guide to us how to do a research in purpose to produce a good outcome from example that been studied. She also providing a lot of guidance and valuable advice during the completion of this task and also guideline to prepare for the group assignment although disrupt the time of her rest. Her dynamism, vision, and motivation have deeply inspired us. She always shares a lot of important information, useful tips and knowledge for us that inspired our performance. She always share updated news from article for our references to gain knowledge. Hopefully, her kindness will be rewarded with the gift from Allah S.W.T which are priceless. It was a great privilege and honor to study under her guidance. We are extremely grateful for what she has been offered us. We would also like to thank her for the empathy, an effort and great sense of humor. This appreciation also we dedicate to our parents who always pray for the blessing us here, give encouragement and support. We would like to express our thankful to our siblings for their love, understanding, prayers and continuing support to complete this group assignment. A lot of thanks that we want to wish to all our classmates because they also help us in brainstorming. Finally, this report cannot be completed without the precious effort and co-operation from our group member Edry Luqman Azman, Mohd Daniel Bin Zainodin , Muhammad Azhar Bin Bahrudin, Muhammad Azrull Amin Bin Ismail and Muhammad Syahirul Syazwan Bin Rozaini. Thank you because always we always stick together in all situation and work hard to produce a report with quality using our all effort and responsibility. Hope that all the effort will give a lot of benefits. Insya’Allah.

TABLE OF CONTENT

NO.

TOPIC

PAGE NO.

1.

Introduction

1

2.

Chapter 1: Identified Issues

3-6

3.

Chapter 2: The Effect to SMEs

7-10

4.

Chapter 3: Recommendation for SMEs

11-12

5.

Chapter 4: Recommendation for Government of Malaysia

13-14

6.

Chapter 5: Predicted Trend

15

7.

Conclusion

16

8.

Reference

17-21

9.

Appendix

22-23

INTRODUCTION The coronavirus pandemic is causing severe human suffering globally and lead to large scale loss of life. In living memory of every people who live within the pandemic, they will know that it is the largest public health crisis (Syed et al., 2020). COVID-19 pandemic also generated a major economic crisis, with a halt in production in affected countries, a collapse in consumption and confidence, and stock exchanges responding negatively to heightened uncertainties (McGeever et al., 2020). On 2 January 2021, the total number of accumulated cases in Malaysia are 117,373 cases has been reported with 22,398 (19.1%) number of active case, 483 (0.43%) number of total death with total recovered cases as much as 94,942 people or (8 0.5%) (KKM, 2021). According to Chief Director of Health, Tan Sri Dr Noor Hisham Abdullah, as we enter the third phases of COVID-19 pandemic, the trend number of positive cases will be expected rise soon within January 2021 until March 2021 (Lee, 2021). With this forecasting statement, means that the small business owner went again to the same situation as they felt during the first phase of COVID-19 pandemic (Lee, 2021). Life will never be the same again for small business owners. The damage inflicted upon small and medium enterprise (SMEs) by the COVID-19 pandemic will have a long-lasting impact on companies. Some will take a long period such as within a year to recovered back while other may never re-open their doors as they give up on their business. As SMEs have been affected by the pandemic, most businesses, including the small medium enterprises (SMEs) and micro SMEs which make up a significant 98.5% of Malaysian businesses (SME Corporation Malaysia, 2020). PRIHATIN or the Prihatin Rakyat Stimulus Package has been introduced by the Malaysian government to show their concern and responded to the coronavirus threat (Voon, 2020). The purpose of PRIHATIN is to help ease financial burdens of the people and businesses coping with the pandemic (Ministry of Finance Malaysia, 2020), especially with the enforcement of a movement control order (MCO) issued by the federal government. However, there is an argument mentioned by SME representatives as they argued that the allocation in the stimulus packages were insufficient to help the SMEs (Fong, 2020). This led to the introduction of additions to PRIHATIN by the federal government specifically for SMEs (Prime Minister's Office of Malaysia, 2020). According to Radhi (2020), this relief was lauded by some SMEs, while according to Tan, (2020) others have commented due to the insufficient fund the only managed to help SMEs to last an additional two months during the MCO (Tan, 2020). With this situation, the effect received by SMEs company add a burden to their management 1

especially during the shutdown of the business due to Movement Control Order (MCO) within estimated 3 months started from 18 March 2020 until 10 Jun 202 0. Due to that, they had make a decision by reducing the number of employee immediately to stabilize their financial management (Cowling et al., 2020). This underscore concerns from the SMEs and the millions working for them (OECD Secretary General, 2020). According to Malaysian’s Gross Domestic Product (GDP) growth, there is sharp decline toward the economy that estimated has been effected by the COVID-19 pandemic that led from closing all business due to MCO. The estimated total loss for Malaysia per day is about RM 2.6 billion (Syed et al., 2020) Chart 1.0 Malaysia’s GDP Growth

Soures: Department of Statistic Malaysia, Bank Negara Malaysia In the United States, unemployment figures have already reached 26.5 million people (as at 23 April 2020) (Pickert, 2020). The Department of Statistics Malaysia has also reported rising levels of unemployment in Malaysia with the percentage increase to 4.7% (DOSM, 2021). This presents an urgent need for a means to halt and reverse these trends as high levels of unemployment can eventually give way to social woes such as higher rates of crime (Shafi et al., 2020). This report brief a result of one such engagement, which highlighted the effect and issue relating the SMEs during the COVID-19 pandemic. To generated valuable feedback, the recommendation also been stated with all the suggestion from certain global literature that lead to enchance the best predicted trend in order to estimate the fate for SMEs after the post COVID-19 pandemic. 2

CHAPTER 1 IDENTIFIED ISSUES

This chapter will elaborate in detail about identified issue pandemic on small and medium-sized enterprises (SME). There eight (8) identified issue that has been studies were give an effect to SMEs sector during the COVID-19 pandemic. 1.0

Introduction

The COVID-19 pandemic hit SMEs sector in Malaysia with drastically decline in their performance trend. Some of them need to think of a million ways on how to survive. According to the report made by (SME Corp Malaysia, 2020), there are 48.4 percent number of SMEs in Malaysia in 2020 compared to 48.0 percent from the previous year (SME Corp Malaysia, 2020). Referring to research studies made by Ratnasingam (2020), SMEs are the first to show their declined performance since the first phase of Movement Control Order has been restricted. Therefore, this chapter will elaborate closely to identify the issues that have been faced by SMEs sector during their struggling to survive within and post of the COVID-19 pandemic. 1.1

Issues According to the finding that have been made by Voon (2020), there are five issues that

have been highlighted due to their impact on majority of SMEs in Malaysia during the COVID-19 pandemic. There is an issue such as different size led to different challenge, delay and rejection by bank in obtaining loans, wage subsidy programmed limits option, exclusion of unregistered SMEs, and policy gaps. 1.1.1 Different size, different challenges The first issue is regarding to different sizes of SMEs will have different challenges. These issue have been agreed by Martín-Martínez (2020) through his book Researching Globalization stated that larger SMEs may have millions in cash reserve in order to maintain their payroll to their employee. While for small SMEs that has low capital to survive, they had to reduce their employee due to stabilize their financial. These statement have been supported by Voon (2020), through her findings that making a larger counterparts as they may not have an inaccurate representation in term of share the risk of issue. She also added her opinion that the huge of SMEs profits, then the more risk that they will face to challenge within the period of COVID-19 pandemic. According to report made by SME Corporation (2020), the micro SMEs may struggle even briefer duration 3

due to lack of cash reserve (SME Corp Malaysia, 2020). Most of SMEs may not afford to pay for renting expenses due to the less cash flow to their business. At the end of the day, the choice that they might have is only to leave the office or shop lot because they have not afford to pay the monthly expenses.

1.1.2 Delay and rejection by banks SMEs face less liqudity to pay their obligations during the COVID-19 pandemic.Several SMEs encountered issues obtaining the Special Relief Facility (SRF) for SMEs as banks prefer to deal with existing customers (Free Malaysia Today, 2020). According to Lee (2021), there is about 70% from total overall SMEs sector that apply for reducing tax and loan from banks (Lee, 2021) Chart 1.2 The sales and cash flow of SMEs during the COVID-19.

Source:https://www.thestar.com.my/business/business-news/2020/03/27/surveysuggests-growing-negative-impact-on-service-based-smes From the chart above, the finding made by (Lee, 2021), have identified the different of SMEs performance between before Movement Control Order (MCO) and after one (1) week Movement Control Oder (MCO) was implemented by the government of Malaysia. According to (Lee, 2021), nearly 40% of SMEs would like to have reduction in service tax for worker who had take unpaid leave. He also mentioned that there was an declining trend of cash flow due to declining in supply chain. Due to that, SMEs were unable to fulfilled all the demand from the customer because of lack of cash, funds and capital. Therefore, they went to ask for loan from the bank within the 4

period. According to Shafi (2020), bank procedures requiring KYC which stand for know your customer) guidelines use a traditional scoring method to approved the loan that have been applied by SMEs companies. The long wait is another factor as to why bank prefer dealing with their loyal or existing customer as they can be approved more quickly (Shafi et al., 2020). Therefore, the issues arise when the SMEs inividual or companies are the first timer customer that enhance to make a loan. Surely they had to wait for a long period of time for their long to be processes instead of using moratorium from the bank that able to extend their period of loan payment back (Shafi et al., 2020). 1.1.3 Wage Subsidy Programme limits options for some businesses In 17 July 2020, Prime Minister of Malaysia, Tan Sri Muhyiddin Yassin has announced that the government want to launched The Wage Subsidy Programme (WSP) introduced in PRIHATIN in order to ease the the burden by the SMEs sector (Ratnasingam et al., 2020). This is one of the alternative taken by the government to re-boosting the economy after the post of Movement Control Order (MCO) period. These subsidy programme have well managed by the Social Security Organisation (SOSCO). The issues come rises when SOSCO was not taken up by some business because they want to maintain to downsize or review salaries as part of their plan to optimise their workforce should the business’s financial resources deplete (Cowling et al., 2020). Furthermor, these are not be allowed under (WSP) condition which requires businesses to retain their staff for at least six months and salaries cannot be reduced (Cowling et al., 2020). Therefore, for some SMEs, the cost of upkeeping payroll outweighs the benefits of the WSP. 1.1.4 Exclusion of unregistered SMEs According to Companies Commission of Malaysia (SSM), they have been enacted the Registration of Business Act 1956 (Act 197) that stated all the business that have been work must need to register to register under Inland Revenue Board (LHDN). The main purpose is to know the required amount of taxable and also benefited to tax payer as they can claim their relief (Voon, 2020). SMEs that unable to have a business tax file with the Inland Revenue Board (LHDN) and failing to register their businesses with the Companies Commission of Malaysia (SSM) will lose out on micro grants and other government benefits (Lee, 2021). Therefore, the lack of business registration denies all the relief that they can claim from LHDN. They also failing to access the cash handouts provided by PRIHATIN and the existing Bantuan Sara Hidup programme (Cheng, 2020). Informal businesses are also less traceable, giving banks much cause for concern in terms of special relief facility (SRF) repayment ability (SME Corp Malaysia, 2020).

5

1.1.5 Policy gaps affecting e-commerce processes In period of MCO, e-commerce activities is the only alternative for some of SMEs that were affected and lack of income as it was listed as an essential service by the federal government (SME Corp Malaysia, 2020). However, SMEs were prohibited from carrying out th e necessary ordering processes as the MCO implemented need all people to minimum their movement and only left their home for only emergency cases (McGeever et al., 2020). SMEs who were using ecommerce as their sources of income were not allowed to access warehouses which then prevented the necessary processes of sorting, packing, and dispatch necessary in completing an order (McGeever et al., 2020). Hence, intent in recognising e-commerce as an essential service did not synchronise with its execution (Syed et al., 2020). Moreover, (SME Corp Malaysia, 2020) also highlighted the post COVID-19 post landscape that might affect SMEs plan as new policy will come out with new interest from the customer and it was another challenge for SMEs sector to fulfilled the customer demand. Refer infographic 1.0 Infographic 1.0 The post COVID-19 Business Landscape

Source: SME Corporation Sdn Berhad, April 2020

6

CHAPTER 2 THE EFFECT TO SME’s

Due to the COVID-19 pandemic, which has sparked instability and uncertainty in our economy, the world has seen devastating consequences. This resulted in a complete halt in trade, as reported by the SME Corporation Malaysia 2020, effectively affecting most businesses, including small medium enterprises (SMEs) and micro-SMEs, which make up a substantial 98.5% of Malaysian enterprises. 2.0 Effects of COVID-19 towards SME’s 2.1 Closure of SME’s The main issue addressed by these SMEs is the risk of closure over the next few months because of the pandemic. According to Chin Chee Seong, Vice-President of the SME Association of Malaysia, if the MCO continues to persist, many SMEs have the potential to shut down. A survey conducted by the association among 1,713 members in August revealed that in the next six months, 20 percent of respondents were considering permanently shutting down their company. The survey also found that 22% of respondents had enough cash flow to last them for a month, while 27% were able to sustain them until November and 31% until December. Another survey conducted shows that since March, when the Movement Contro l Order (MCO) was first implemented to contain the spread of Covid-19, a total of 32,649 SME's have folded. Minister of Entrepreneurship Development and Cooperatives Wan Junaidi Tuanku Jaafar said that during the first phase of the MCO, from 18 March to 9 June, 9,675 SMEs shut down their operations. 22,794 SMEs folded from June to September, with August recording the highest figure of 17,800 SMEs closing during that month.

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2.2 Issues faced by business operations during the MCO Besides the risk of capsizing, businesses also faced various problems during regular operations since MCO began. The problems include but are not limited to: 1. Fiancials 2. Consumer Base 3. Technology 4. Supply Chain 5. Employees 2.2.1 FINANCIALS Any company must run on some kind of funding, but after the start of the MCO, most SMEs do not have the amount of funds needed to hold their companies running. In late March and early April, researchers surveyed participants as the severity of the fact started to be investigated by a study of more than 5,800 small firms. One result found that 75% of companies only have enough money on hand to last two months or less. Relatedly, if COVID-19 only las...