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Rising Costs of Doing Business in Malaysia: FMM Survey Reveals 1H 2023 Challenges

FMM In The News: BUSINESS TODAY, September 11, 2023 - In the first half of 2023, manufacturers in Malaysia faced a significant increase in their operating costs due to a combination of domestic and international factors, as revealed in the latest business conditions survey conducted by the Federation of Malaysia Manufacturers (FMM).

According to the bi-annual survey, a majority of the respondents experienced cost escalations of up to 20% in various key areas such as labor, machinery maintenance, raw materials, and energy.

Specifically, more than half (52%) of the respondents reported labor cost increases of up to 10%, with 23% indicating a rise between 11% and 20%, and 9% grappling with increases exceeding 20%.

In terms of energy costs, 41% of respondents noted an increase of up to 10%, while 16% reported a more significant surge of over 20%, primarily falling within the range of 21% to 50%.

Machinery maintenance costs also saw an upswing, with 48% of respondents witnessing increases of up to 10%, and 16% experiencing a rise ranging between 11% and 20%.

Regarding raw materials, 36% of respondents indicated an increase of up to 10%, while 25% faced a surge of between 11% and 20%, and 11% confronted a substantial increase exceeding 20%.

FMM president, Tan Sri Soh Thian Lai, highlighted the reasons behind these rising operational costs, attributing them to global supply chain disruptions, the implementation of minimum wage policies, the removal of government utilities subsidies, and the adverse impact of a weak Malaysian Ringgit against the US Dollar. Soh emphasized that this depreciation of the Ringgit has particularly burdened manufacturers, given that more than half of intermediate goods are imported for production.

In response to this challenging environment, Soh urged the Malaysian government and the Bank Negara Malaysia (BNM) to collaborate on measures to strengthen the Ringgit’s performance against the US Dollar.

To mitigate the pressure from the weakened Ringgit, many companies are considering the use of alternative currencies for their imports and exports. Respondents in the survey favored the Chinese Renminbi (Yuan) as the top alternative currency for both exports and imports, followed by the European Euro and the Japanese Yen. This shift is primarily driven by foreign buyers’ requests to transact in different currencies and foreign sellers’ preferences for non-USD payments.

Additionally, the FMM called for the retention of the Overnight Policy Rate (OPR) at its current level, given the adverse impacts on manufacturers’ revenue and profit margins if the rate were to increase by 25 basis points by the end of 2023. A previous 25bps increase in the OPR to 3% in May had already affected operating costs for 75% of respondents, with concerns about cash flow, consumer spending patterns, and the need to adjust capital expenditure and business strategies.

The FMM’s semi-annual survey encompassed 351 respondents nationwide and was conducted from July 5 to August 18, 2023.

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