Impact of the financial and economic crisis on SMEs

1. Impact of the financial and economic crisis on SMEs Paul Vandenberg International Management Institute New Delhi UNESCWA Conference on ‘Innovative sources to finance SMEs’ 16-17 Feb. 2010 Dubai

2. Centre of the storm: U.S. financial institutions and wider U.S. economy drastically affected major but short-term credit crunch non-U.S. financial institutions (mostly European) with exposure to mortgage backed securities (MBS) also affected Emerging stock markets impacted as U.S. and European investors shore up positions at home Reduction in U.S. demand causes reduction in global demand Results in decline in export demand for developing and emerging economies Large increase, then decrease in oil price Good for oil importers Not so good for oil exporters Decline in remittances flowing from Gulf and other states with large expatriate workforce Impact of U.S. sub-prime crisis on global economy

3. ‘Heard about it before it was felt’: like much of the world outside of America Impact on much of W. Asia not as severe as U.S., Japan and Europe Most countries will have avoided recession i.e. two successive quarters of negative growth Mostly export sectors Drastic downturn was avoided in many W. Asian countries Global and regional revival is expected in 2010 May have longer-term affect on fiscal position for countries with large stimulus packages (Egypt, Saudi Arabia) W. Asia impact: overall

6. Large firms (with export exposure) appear to be more affected SME affected if exporting or linked in supply chain to exporting producers May have been some credit squeeze for SMEs but extent is unknown in W. Asia Banking sector in Middle East remained stable and liquid Other initiatives in the region to improve finance and the business environment moving ahead irrespective of the crisis Enterprise affect

7. Domestic bankers more wary of lending to SMEs, notably those with inter’l exposure In times of uncertainty, bankers will be cautious and take fewer risks, which can mean less lending to SMEs Limit exposure to certain sectors Consumer confidence impacted: delaying purchases (stifles demand further), self-fulfilling downturn Dumping from Asia: importers offered sweet credit terms Bank lending impact

8. SME specific Waived reserve requirement on deposits equal to lending to SMEs All enterprises Reduced tariffs on capital goods and production components w/o local substitutes 50% increase in finance to export programs (benefiting 1,300 companies) Subsidizing cost and increasing number of companies participating in inter’l trade fairs Waiving sales tax on capital goods for one year Rescheduling debt, providing loans in tourism sector Increased marketing of Egypt as tourist destination 1-year postponement for payment of 75% of installments on industrial land Reducing by 50% contributions for use of technology centers (11,500 companies, 1 million workers affected) Crisis measures - Egypt

9. New investment fund for SME Sponsored by Industrial Modernization Centre (gov’t) and Arab African Inter’l Bank LE 500 m. fund set up in late 2009 for start-up or expansion equity investment Mostly for medium-sized firms Mashrou’y (launched by Baclay’s Bank during the crisis) Daily interest bank accounts Free chequebooks and statements Advice on specific SMEs projects Also: Latitude Club Linking/networking with SMEs through Barclay’s branches worldwide Club Rooms, Seminars Other initiatives - Egypt

10. Crisis/On-going Expand beneficiary base of interest rate subsidy scheme (2/3 of loans go to SMEs) Strengthening ‘Kafalat’ which guarantees loans for SMEs (up to $400,000) Exempt employers from NSSF fees on new jobs created in 2009-10 Exempt banks from setting aside reserves on credit for new projects (or extension of existing projects) in 2009 To help reduce lending rates from 10% to 7.5% On-going Improving business environment: eliminating unnecessary fees improving legal framework Inception of new Economic and Industrial Zones EU-funded SME Project Business Development Center (4 opened, 2 proposed) Lebanon Recovery Fund Including support for SMEs affected by 2006 conflict Measures - Lebanon

11. Massive $49.6 b stimulus package Equal to 9.4% of GDP (highest in the world) Education, training, health, infrastructure, social services Funding/restructuring specialized develop. finance institutions No specific measures for SMEs Saudi Arabia

12. Government guarantees up to 50% of banking lending in next two years Willing to buy unsubscribed shares in capital raisings Only Gulf state that was forced to save a big bank (Gulf Bank) No specific measures for SMEs Kuwait

13. Other W. Asia countries • Little evidence of specific measures – financial or otherwise – in stimulus packages to assist SMEs • Mostly directed to infrastructure, education and existing initiatives • Money infused into banking system • But several countries will continue with new efforts to support SMEs

14. Ideas from other regions • Tax cuts • temporary lowering of corporate and personal (affects sole proprietors) income tax rates • reduce taxes on consumer durables to increase demand • reduction in excise, VAT/sales tax, tariffs on inputs • Increase government procurement from SMEs • Employment subsidy: hiring or retention • Shorter workweek supplemented with UI

15. Replenish or refinance specialized financial institutions development banks SME credit programs (India) For loan guarantees: establish such scheme, expand % of loan covered, expand coverage available and increase subsidy (UK) Convert an enterprise’s overdrafts to a loan to free up the overdraft (UK) Free advice to SMEs on how to make a proper loan application (Singapore) Increase funds for SME export credit Instruct government departments to pay SMEs promptly (India) Easier credit to SMEs in vulnerable sectors such as textiles (China) Ideas from other regions: financial

16. Policy recommendations Economies are reviving, thus: • Is there still a need for special SME measures to counter the crisis? or • Should countries continue with pre-crisis efforts to expand finance to SMEs, support innovation and reduce regulatory burden? or • Are crisis experiences/experiments usefully carried over to non-crisis period?