The world has seen much turbulence as we march into the New Year of 2016 with oil prices continuing to hit record lows never seen before in 13 years. Economic superpower, China, whom has enjoyed many years of double-digit economic prosperity saw its stock market spiralling down and lost over 30% in the last 6 months. China is expected to record positive growth of its economy albeit at a slower single-digit rate in the coming years. Over at the other capitalist side of the world, just as the Feds raised interest rates as the US economy recovers from its decade-long sub-prime crisis, the Dow Jones lost over a trillion USD just in January 2016! Back in Malaysia, depressed oil prices has resulted in the Ringgit Malaysia weakened by 11% against the green bag in the last 6 months and Government recalibrating its budget 2016 through additional belt-tightening measures to ensure the country stays on course to achieve its forecasted 4% to 4.5% economic growth and the targeted fiscal deficit of 3.1% for 2016.
As we prepare to usher in the Year of Fire Monkey, many are cautious as to how the world and domestic economy will perform for the year. This is the time where all the resilience and reserves that a company has built up over the past years of economic prosperity be put to test. Preservation of cash is king. The ability to read the market and ride the curve will differentiate between the successful entrepreneur and the bankrupt businessman. Many small-medium sized entrepreneurs (SMEs) somewhat do not place enough emphasis on economic surveillance and prudent financial management. Often, millions are lost by underestimating the market tides, inability to compete on a level playing field, cost overrun and the false believe that the economy and industry will flourish each day with contracts in abundance. Highly geared companies will face the greatest wrath of business slowdown as loans still need to be serviced as the repayments are structured on a set of assumed forecasted revenue to be secured. The impact of loss of business income can manifest itself in many ways including sudden drastic reduction in annual contracts or sales volume, technological advancement, weakening domestic currency resulting in cost overrun erasing all existing profit margin, liquidity crunch, shorter credit period and non-performance. There is a need to structure the business to be able to sniff out symptoms of industry slowdown and adopt preventive cost control measures to weather through the turbulence. SMEs need to have a lean cost structure in both areas of opex and capex to stay competitive and agile. Profits must be accumulated in reserves and not spent on a depreciating luxury vehicle in the first year of profit. Hopefully, these painful lessons will not be learnt through the various foreclosure and bankruptcy actions initiated by the banks.
– Adrian Khor | Senior Vice President, Risk Management Division