Singapore’s small and medium enterprises are downbeat about the next six months, especially their level of profitability, according to the latest SBF-DP SME Index.
The Overall Index fell by 3.3 per cent from the last quarter to a score of 50.2, the second lowest score in the Index’s seven-year history. The lowest score of 50.0 was recorded just two quarters ago.
The Index measures the business sentiment of SMEs for the next six months (Q4 of 2016 and Q1 of 2017) and is a joint initiative of the Singapore Business Federation (SBF) and DP Information Group (DP Info). More than 3,600 SMEs were surveyed between July and August 2016 on their outlook and sentiment.
All six industries recorded a decline in their Overall Index Score, a trend observed six months ago. Transport/Storage registered the largest decline at 4.2 per cent, followed by Business Services at 4.0 per cent.
Driver of pessimistic outlook
The pessimistic outlook is driven by a worse outlook for profits, with five of the six sectors indicating they expect their profits to decline or incur losses in the coming two quarters.
Three other sectors – Commerce/Trading (49.9), Manufacturing (49.2) and Transport/Storage (49.7) – had scores below 50 this quarter, indicating they expect worse trading conditions during the coming six months than they are experiencing now.
“It is not surprising that SMEs remain largely pessimistic about their growth prospects, given the persistently tepid global and domestic economy,” says Ho Meng Kit, CEO of SBF. “Brexit in June, which jolted financial markets initially, may have contributed partly to businesses’ weak sentiment for this round of the survey but we do not expect sentiment to improve anytime soon.”
“The lowest profit expectations and second lowest Overall Index in seven years indicate that our SMEs are barely keeping their heads above water. In part, this reflects the constraints of operating in Singapore where costs are high.
“With excess capacity and sluggish demand, it has become tougher for our smaller businesses. We urge our SMEs to look overseas for growth especially in ASEAN which will enjoy good growth of 5.2 per cent over the next five years. Take your chances and venture overseas.
“The Federation stands ready to help our members internationalize. If you confine your business in Singapore, be prepared for a long period of low growth or even declining profitability.”
Lincoln Teo, Chief Operating Officer of DP Information Group, said the prospect of smaller profits is having an impact on the confidence of SMEs.
“The Index profitability score of 4.76 means many SMEs will be anticipating profit challenges and possibly, profit contractions during the next six months,” says Teo. “At the start of each year every SME leader sets a goal to be more profitable than the year before. This year, a range of factors have made this goal tougher to achieve.”
Teo noted that the sluggish global economy, unfavorable exchange rates and rising costs have eroded the cost competitiveness of Singapore’s export growth, dragging down manufacturing and dampening growth.
Furthermore, the strengthening of the Singapore Dollar against the Chinese Yuan and US Dollar has made Singapore’s exports more expensive.
“Trading and Transport companies have become pessimistic in their outlook. Both these industries are heavily tied to volume of world trade which has seen only sluggish growth for the last two years.
“Without optimism, SMEs are struggling to commit to new projects and new hires. This is confirmed by the Index, with SME business expansion plans and hiring intensions both weaker compared to the previous quarter,” Teo said.