KUALA LUMPUR: Activities in the manufacturing sector are expected to remain moderate in the first half of this year (1H 2023) as manufacturers continue to brace for challenging business conditions, particularly in the pressure on inputs costs, increased costs of energy, and ringgit fluctuations, said the Federation of Malaysian Manufacturers (FMM) president Tan Sri Soh Thian Lai.

Soh said that apart from challenging business conditions domestically, the manufacturing sector is also growing slower in tandem with the slowing global economy.

"For the whole of 2022, overall sales have remained generally steady, although local sales had grown at a faster pace than export sales," he said during FMM Business Condition Survey 2H2022 briefing here, today.

Data from the survey revealed that for 1H 2023, local sales are expected to be ahead of export sales in early 2023.

The survey found that both indexes for local and export sales had remained below the optimism threshold for the second survey in a row, implying that a slowdown in sales is expected on both the local and external fronts.

"About 22 per cent of the respondents who are domestic-oriented projected higher sales in the coming months, while 32 per cent responded negatively. For those who are export-oriented, 22 per cent were positive in their near-term sales outlook, down from 26 per cent previously," Soh added.

The FMM president said it is also likely that inventory levels might moderate in line with the current trends in demand, except for the cost of production, capital investment and employment.

"All the other indexes had also registered below the demarcation level of optimism, further surmising the slow outlook going forward," he said.

The survey, which drew 745 respondents nationwide, tracked business confidence via the FMM Business Conditions Index (FMM BCI), covering the actual performance in 2H 2022 and the outlook for 1H 2023.

Higher cost of production

Soh said that weak external demand, especially from key trading partners, further escalation of geo-political tensions and the impact of China's zero-Covid-19 policy, among others, likely weighed on the Malaysian manufacturing sector.

Domestically, he highlighted that the increase of the Overnight Policy Rate (OPR) by Bank Negara Malaysia, which currently stands at 2.75 per cent, has impacted the cost of production.

"The survey revealed that 55 per cent are impacted by an increase in their cost of production. Cash flow and business operations of 44 per cent of the respondents were affected, and 26 per cent had to streamline their operations and strategies to maximise profits," he said.

Asked about the higher energy cost, Soh said the government's removal of the energy subsidy should be gradual to reduce the impacts on the business community.

"The government should remove it in stages which will be less burdening for manufacturers, and they can adjust to the changes," he said.

Commenting on the impact of multilateral agreements on businesses, Soh said 66 per cent of the respondents were aware of the implementation of both the Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) free trade agreements (FTAs).

"But only 11 per cent are utilising both FTAs, while the RCEP and CPTPP are utilised by nine per cent and three per cent of the respondents, respectively. 77 per cent of the respondents have not startedutilising these FTAs, yet of which 41 per cent of respondents cited the reasons of not knowing where to start.

"Another 33 per cent attributed their non-utilisation of the RCEP and CPTPP to their current utilisation of other FTAs and their lower duty rates," he added.

-- BERNAMA