1 APEC Symposium on SME Strategies to Manage the impact of the Global Financial Crisis Chinese Taipei – June 8-9, 2009 SME FINANCING AT TIMES OF ECONOMIC RECESSION Salvatore Zecchini Institute for Industrial Promotion - Rome and Chairman of the OECD WPSMEE Informal Steering Group on SME and Entrepreneurship Financing
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1 APEC Symposium on SME Strategies to Manage the impact of the Global Financial Crisis Chinese Taipei – June 8-9, 2009 SME FINANCING AT TIMES OF ECONOMIC.
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APEC Symposium on SME Strategies to Manage the impact of the Global Financial Crisis
Chinese Taipei – June 8-9, 2009
SME FINANCING AT TIMES OF ECONOMIC RECESSION
Salvatore Zecchini
Institute for Industrial Promotion - Romeand
Chairman of the OECD WPSMEE Informal Steering Group on SME and Entrepreneurship Financing
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• SMEs, especially innovatives ones, are hit harder by the current global financial crisis than other firms.
• More vulnerable, because they involve higher risk and weaker financial structures.
• Still they deserve special attention, because they are essential for long-term economic growth.
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Focus of this presentation:
- Role of SMEs in economic growth
- Scale of the financial problem of SMEs
- Main stumbling blocks
- Solutions adopted in OECD countries and suggestions
5Source, OECD-Eurostat Entrepreneurship Indicators Program, “Measuring Entrepreneurship: a digest of indicators”, 2008
6Source, OECD-Eurostat Entrepreneurship Indicators Program, “Measuring Entrepreneurship: a digest of indicators”, 2008
7Source, OECD-Eurostat Entrepreneurship Indicators Program, “Measuring Entrepreneurship: a digest of indicators”, 2008
8Source, OECD-Eurostat Entrepreneurship Indicators Program, “Measuring Entrepreneurship: a digest of indicators”, 2008
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Number of enterprises by size, EU-27, 2002-2007
Source: First Section of the Annual Report on EU Small and Medium-sized Entreprises, EIM, Zoetermeer, January 12, 2009
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Value added and employment in the non-financial business economy in old (EU15) and new (EU-12)
Member States by size-class, 2007
Source: First Section of the Annual Report on EU Small and Medium-sized Entreprises, EIM, Zoetermeer, January 12, 2009
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Propensity to invest of SMEs by size class, EU-27, 2007
Source: First Section of the Annual Report on EU Small and Medium-sized Entreprises, EIM, Zoetermeer, January 12, 2009
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Sources of financing difficulties:
- Cash-flow problem and profit squeeze
- Credit rationing
- Reduction in fundraising for equity capital, seed capital , VC investment, private equity
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SMEs are currently caught in a bind:
On the one side, falling sales and slump in new orders;
On the other side, liquidity shortage, higher payment delays, tighter bank credit, drying up of equity capital sources.
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Leverage of the Italian manufacturing enterprises
Source: “Rapporto sulle tendenze nel sistema produttivo italiano”, Bank of Italy, November 2008
Source: “Rapporto sulle tendenze nel sistema produttivo italiano”, Bank of Italy, November 2008
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Overview of Financial Markets
FTSE 350 stock mkt index
FTSE Small Cap Index Hang Seng stock mkt index
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CDS in Europe, Investment Grade, 5 years maturity - average
0
100
200
300
400
500
600
700
80002
/01/
2006
02/0
3/20
06
02/0
5/20
06
02/0
7/20
06
02/0
9/20
06
02/1
1/20
06
02/0
1/20
07
02/0
3/20
07
02/0
5/20
07
02/0
7/20
07
02/0
9/20
07
02/1
1/20
07
02/0
1/20
08
02/0
3/20
08
02/0
5/20
08
02/0
7/20
08
02/0
9/20
08
02/1
1/20
08
02/0
1/20
09
02/0
3/20
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CDS EU Auto - 5 years
CDS EU Industrial - 5 years
CDS EU Consumer - 5 years
CDS EU Energy - 5 years
CDS EU Financial Senior - 5 years
CDS EU Financial Subordinated - 5 years
CDS EU Telecomunication - 5 years
Source: Bloomberg
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The BALTIC INDEX
Source: Bloomberg Finance L.P. 2009
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Banks with tighter lending conditions
Source: EcoWin, in “Denmark National Bank”, Monetary Review, 4th Quarter 2008.
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Demand for credit in the US
Source: Federal Reserve, Senior Loan Officer Opinion Survey on Bank Lending Practices, released February 2, 2009
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• In view of declining sales expectations and uncertainties on the duration of recession, it is not surprising that SMEs curtailed their bank credit demand in most countries.
• But there is ample evidence that small businesses in all countries are finding it harder to borrow from banks. The tightening of bank loan conditions can be seen through several indicators, such as rising spreads, widening gaps between requested funds and granted amounts, higher collateral or guarantee requirements, longer delays in loan processing and higher lending fees.
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Impacts on SMEs (Cf. Table 1) SME demand for bank credit (Cf. Annex 2)
Demand Working capital & Payment
delays
Exits (Insolvencies and
bankruptcies)
Total Short-term
Long-term
OECD members Australia Inconclusive + Austria =
Belgium - - - + + = - - Canada - - + - +
Czech Republic = Denmark + + Finland - - + + + France + + - - -
Germany - = - - - Greece - - - + =
Hungary + - + - Ireland + + +
Italy - + + + - = - Japan - + Korea - + + -
Mexico - + Netherlands - + - -
New Zealand - - - + + - - Spain + + +
Switzerland = UK - - + + - - + - - -
USA - - - - - + - - - EC - - - - - - -
Non OECD members
Chile - Estonia =
Romania Russia
Slovenia = Thailand
Source: Country Reponses to the 14 January OECD WPSMEE Questionnaire on the Impact of the Global Crisis on SMEs and Entrepreneurship Financing and Credit reform Economic 2008/09.
Experienced or expected impacts of the crisis on SME and entrepreneurship financing
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In such an unfavourable lending environment, SMEs have to tap alternative funding sources,
such as self-financing, new equity, factoring, private equity, and venture capital.
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Global venture capital investment 2000-2008 in USD
0,00
1.000.000,00
2.000.000,00
3.000.000,00
4.000.000,00
5.000.000,00
6.000.000,00
7.000.000,00
8.000.000,00
2000 2001 2002 2003 2004 2005 2006 2007 2008
Mio
. US
$
Source: VentureXpert, 2009
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• Common concern of Governments at this juncture is to soften the recession impact on SMEs
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Source: OECD WPSMEE Questionnaire on the Impact of the Global Crisis on SMEs and Entrepreneurship Financing and publicly available information.
Policy responses A. Measures supporting sales, cash flows and
working capital (Annex 5)
B. Enhancing SME access to liquidity, especially to bank lending (Annex 6)
Alleviating working capital
shortage in the
economy
Reducing and easing
tax payments
Export facilitation
Easing procure-
ment payment
procedures
Creation and extension of
loan & guarantee schemes
Mediation and
monitoring
C. Strengthen-
ing pro-investment measures (Annex 6)
D. Strengthen-ing capital base and private
equity and venture capital
(Annex 7)
OECD
Australia Austria Belgium Mediator Canada
Czech Republic Denmark Finland France Mediator
Germany Greece Hungary
Italy Monitoring Japan Korea
Luxembourg Mexico
Netherlands New Zealand
Spain Switzerland
UK USA Monitoring EC
Non-OECD
Brazil Chile
Estonia Romania Russia
Slovenia Thailand
International Financial Institutions
EIB/EIF
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In the financing domain, the various measures can be grouped into three categories:
• working capital support;
• easier access to bank lending;
• help to maintain SMEs investment levels.
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Conclusions and Additional steps to be considered
To promote the availability and diffusion of timely information (more information on bank lending to small firms and medium-sized ones; to establish a “SME Financing Scoreboard ”)
Improve cash flow (accelerated depreciation, tax incentives, factoring, public procurement with attention to SMEs, support to R&D and innovative products)
Facilitate Access to credit (boost to credit guarantee programs, risk sharing with private lenders, credit mediators, and lending monitors)
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• To foster investment (by enhancing venture capital supply, improving vc exit mkts, increasing public equity funds)
• To promote business services and SME engagement in the design of relevant policies
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Above all measures, there is a need to provide strong macroeconomic support