MALAYSIA’S micro, small and medium enterprises (MSMEs) have entered the first half of 2025 (1H25) with a tempered sense of optimism, according to the latest SME Sentiment Index compiled by Small Medium Enterprise Development Bank Malaysia Bhd (SME Bank).
The index dipped slightly to 55.2 in 1H25 from 55.8 in 2H24, “marking the turning point from our last four surveys where consistent upward trends were observed amid strong recovery post Covid-19”.
While the majority of MSMEs continue to look ahead positively, the moderation reflects growing external uncertainties and domestic cost pressures.
This cautiously optimistic sentiment among MSMEs aligns with other forward-looking indicators, including the Department of Statistics Malaysia’s (DOSM) Leading Index which predicts softer economic conditions in the coming months.
The survey, conducted between January and April 2025, captured responses from a record 2,007 participants across 39 sectors, making it the most comprehensive edition to date.
Confidence held steady for most of the survey period, with 54% of respondents expecting the economy to improve over the next 6 to 12 months.
However, sentiment slipped to 51% in the latter part of the window, following the announcement of US reciprocal tariffs on April 2.
Increased uncertainty on the external front could lead to downward revision for this year’s GDP growth projection of 4.5% to 5.5% (2024: 5.1%), mainly stemming from the potential slowdown in global trade.
The World Trade Organisation (WTO) now forecasts a -0.2% contraction in global trade for 2025, compared to +2.9% in 2024.
Diverging Outlook in Biz Sizes, Sectors
There has been a notable shift in sentiment by business size.
In this 1H25 survey, micro (58%) businesses are more optimistic, whereas small (53%), medium (47%) and large (40%) are comparatively more cautious. This is a reversal from 2H24 survey, where large businesses were the most optimistic.
The more subdued outlook among large businesses may be due to their higher exposure to foreign markets, with 58% of raw materials sourced internationally, compared to 47% for medium-sized firms.
Large (13%) and medium (24%) sized businesses have a higher share of their export-to-overall sales, compared to their small (12%) and micro (4%) counterparts.
Among the various sectors, education emerged as the most confident, rising to 65% in 1H25 from 50% in the previous survey.
Its nature of domestic-oriented (less exposure to external shocks), as well as other favourable growth factors such as growing wages/ disposable income and the government’s promotion of Technical and Vocational Education and Training (TVET) are potential contributors. Likewise, private education sales grew steadily in 2024 at 9.5% year-on-year (YoY).
Business Costing Remains High
On the sales front, expectations remain generally positive, although there was a slight moderation.
Easing sales expectations but still generally positive with 62% of respondents anticipating an increase in the coming months (2H24: 64%).
MSMEs remain watchful of rising input costs.
The majority of MSMEs (83%) expect their costs to increase (2H24: 87%), despite deeper decline in producer prices (year-to-date [YTD] April 2025: -1.1% YoY; 2H24: -0.5% YoY). Key drivers of higher costs include raw materials (21%), labour (20%), and utilities and logistics (14% each).
Implementation of e-invoicing, electricity tariff hike, the increase in minimum wage to RM1,700, multi-tiered levy system on foreign workers, mandatory Employee Provident Fund (EPF) contributions (2% of monthly wages) for foreign workers effective fourth quarter of 2025 and potential expansion of Sales and Service Tax (SST), among others are expected to push costs higher moving forward.
Although sentiment on sales and the economy may be easing, hiring plans remain relatively steady.
Most of the MSMEs (47%) plan to maintain their current workforce level (2H: 43%), contrary to the previous survey where businesses were keen to increase hiring.
The ICT sector, in particular, saw a significant jump in hiring intentions to 62% from 45% previously.
Based on Knight Frank’s report, Malaysia currently has 54 operational data centres and 61 upcoming new ones.
ESG Adoption Still in Focus
MSMEs are also warming up to digital initiatives.
Most of the MSMEs (45%) now view e-invoicing as beneficial to their businesses, contrary to our previous survey in 2H24 where the majority were indifferent about this initiative. Adoption is especially strong among micro and small firms due to lower implementation complexity.
On the environmental, social and governance (ESG) front, “more MSMEs continue to move towards
fully or partially implementing ESG practices (1H25: 64% versus 2H24: 62%), while 19% (2H24: 18%) are in the transitioning or exploring process”.
Among those who have embraced ESG, “51% said it helps them save costs…other key reasons cited for the adoption of ESG are new business opportunities (19%), branding (18%) and mandatory requirements (12%).
Despite softer sales and rising costs, business expansion remains a key goal.
Business expansion remains as the top focus for MSMEs (1H25: 65% versus 2H24: 73%) across all business sizes.
Financing continues to top the list of MSME needs. It remains the top assistance required by MSMEs where 43% have indicated the need for working capital and 38% for business expansion.
At the same time, financial buffers are under pressure. Sixty-six percent of MSMEs (2H: 68%) reported having cash reserves that could last more than 6 months.
By size, micro businesses were the most vulnerable (43%) to low cash reserves.
While challenges remain on the horizon, SME Bank sees reasons for confidence.
“We remain confident that MSMEs are resilient as they continue to demonstrate stronger performance and growth potential, showcasing their vital role as the country’s key pillars of growth and stability, especially for this challenging year of 2025.”
Source: https://themalaysianreserve.com/2025/06/23/cautious-confidence-among-msmes-as-global-risks-loom/amp/