Singapore SME business sentiments recovering from challenging 2020

Photo by Stijn Dijkstra

In September 2020, the SBF-Experian SME Index for 4Q20 – 1Q21F registered an overall reading of 46.3, based on data collected between July and August 2020, the lowest reading since the inception of the SME Index (“the Index”) in 2009.

This index, a joint initiative of the Singapore Business Federation (SBF) and Experian – measures the business sentiment of SMEs in Singapore for the next six months (October 2020 to March 2021).

However, in the SBF National Business Survey 2020/2021, 69% of companies felt confident in sustaining their business over the next 12 months., with one-third of companies (31%) expect business and economic climate to improve in the next 12 months, a significant improvement from the 8% in last year’s survey.

In this time, 84% of businesses also reported accelerating their their digital transformation due to the COVID-19 pandemic, by an average of 2 years. 39% of companies reported having increased their IT budgets, by an average of 29%.

The subsequent Index for 2Q21 – 3Q21F suggests a recovering optimism, with SMEs moving beyond preservation mode to leverage new opportunities, even as economic recovery remains gradual and uneven across sectors.

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The Index comprises inputs from SMEs on their expectations in seven key areas – Turnover, Profitability, Business Expansion, Capital Investment, Hiring, Capacity Utilisation, and Access to Financing. This Index is based on a survey of more than 2,100 SMEs across six sectors – ‘Commerce / Trading’, ‘Construction / Engineering’, ‘Manufacturing’, ‘Retail / F&B’, ‘Business Services’, and ‘Transport / Storage’.

The outlook mid-2020

The COVID-19 pandemic constrained global growth and slowed economic activities around the world. Restrictions enacted worldwide to stem the spread of COVID-19 led to steep declines in key global markets.

The GDP of the United States contracted by a record 32.9% in 2Q20, while China decided against setting a GDP target for the first time in decades, highlighting the extent of the uncertainties dominating the global economy.

The Asia-Pacific region’s economy is expected to contract by 3.7% in 2020. Singapore saw its economy contract by 13.2% year-on-year in 2Q20, prompting the Ministry of Trade and Industry (MTI) to downgrade its GDP growth forecast for 2020 to -7% to -5%. The weaker outlook was attributed to a depressed external economic environment, continued closure of international borders, and the delayed resumption of activities for sectors reliant on foreign workers.

Given the uncertainties stemming from the pandemic and restrictions put in place to slow the spread of COVID-19, the overall outlook of Singapore’s SMEs for 4Q20 – 1Q21F was accordingly damped. SMEs within the six sectors surveyed have all registered readings below 50, signalling contractionary sentiments.

Understandably, SMEs across most sectors remained cautious in this time scaling back growth and expansion plans and adopting a wait-and-see approach. Capital Investment Expectations, which also remained unchanged (5.03) from the previous survey, suggested that SMEs were likely more focused on resolving immediate day-to-day challenges, leaving investment and expansion opportunities on the backburner to maximise cashflow.

Optimism cautiously rising towards end of 2020

However, in data collected in October and November 2020 for the SBF National Business Survey 2020/2021, a more optimistic, though still cautious, sentiment was observed. Close to two thirds (63%) of businesses reported that they have been negatively impacted by the COVID-19 pandemic, with an average decline in revenue of 31%. However, many businesses believed the economy would improve in 2021, and more than two in three (69%) remained confident in sustaining their business over the next 12 months.

Overall, about one-third of companies (31%) expected business and economic climate to improve in the next 12 months, with an almost equal proportion (32%) expecting business climate to worsen.

One in four businesses negatively impacted by COVID-19 expected their business to fully recover within the next six to 12 months. However, most (70%) expected full business recovery to occur only in 2022 or beyond. Like with the impact of the pandemic, sentiments on recovery were also uneven across industries.

Timely and targeted transformation

Companies of all sizes reported prioritising revenue growth, maintaining a positive cashflow and reducing costs in order to remain viable and sustain their business. Almost one in five (19%) companies recognised the need to streamline their businesses or operational processes, as well as attract and retain talent, developments that augur well for business sustainability and growth.

There was also greater emphasis on manpower training and development to ensure that the workforce remains relevant and competitive. Vast majority (97%) of companies opined that training and staff development had become more or equally important in developing relevant skills and job-related capabilities to help them remain resilient and competitive in this changing digital landscape.

The COVID-19 pandemic has given a strong push for digital transformation. Over 8 in 10 (84%) businesses reported having accelerated their digital transformation due to COVID-19, by an average of 2 years. 39% of companies reported having increased their IT budgets, by an average of 29%.

The pace of transformation plays an important role in the ability of businesses to overcome the crisis. While 72% of businesses with a high level of transformation are confident in sustaining their business over the next 12 months, 41% of those with low levels of transformation were not.

Towards the post-pandemic future

Survey data conducted between 18 January and 26 February 2021 for the SBF-Experian Index for 2Q21 – 3Q21F indicated a recovery of optimism with an overall reading of 49.92, an increase from the 48.2 reading in the previous quarter. This is also the highest reading since the start of the COVID-19 pandemic in 1Q20.

While SMEs across all six sectors registered this improvement in business sentiments. The most significant gains were for internal-facing sectors such as Construction / Engineering and Business Services. This is likely due to the easing of COVID-19 restrictions, which has enabled the resumption of business activities on a broader scale.

SMEs have benefitted from the Government’s slew of support measures in 2020. Support is expected to continue into 2021 with an S$11 billion COVID-19 Resilience Package, while S$24 billion has been earmarked over the next three years to help businesses adapt post-pandemic. With the economy poised for a gradual recovery, most SMEs appear to be looking beyond keeping their business afloat and are looking to capitalise on the resumption of business activity over the next six months.

A slight improvement in expectations around Business Expansion (increased by 1.98%) suggests that SMEs may be exploring opportunities that were initially delayed by the pandemic.

Expectations around Hiring also registered an increase of 2.54% to 5.24 (from 5.11), likely in support of aspirations in business expansion. The ongoing economic recovery and availability of various government support measures may also have boosted the ability of SMEs to replace and bolster their workforce.

“Overall, SMEs appear to be gradually relaxing the wait-and-see approach they had previously adopted as the uncertainty dominating preceding quarters begin to recede,” said James Gothard, General Manager, Credit Services & Strategy, Southeast Asia, Experian.

“Due to ongoing downside risks posed by COVID-19, it will remain important for SMEs to boost their overall resiliency towards any unexpected shocks to the global economy,” he added.

“With government support schemes for SMEs continuing into 2021, SMEs will need to explore and invest in aspects such as manpower upskilling and digitalisation, both of which could help firms remain competitive and relevant in the long term.”

Mr Lam Yi Young, CEO of SBF said, “This second consecutive improvement in the reading of the quarterly SBF-Experian SME Index shows that business sentiments among SMEs are on the rise.

“The gradual reopening of our economy, the easing of business restrictions, and the wide range of Budget measures announced earlier this year have given a much-needed boost to the confidence of our SMEs. Many are looking forward to re-building their businesses after the devastating impact of the COVID-19 pandemic.”