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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. Centre of the storm: U.S. financial institutions and wider U.S. economy drastically affected

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impact of the financial and economic crisis on smes

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

impact of u s sub prime crisis on global economy
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
w asia impact overall
‘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
enterprise affect
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
bank lending impact
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
crisis measures egypt
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
other initiatives egypt
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
measures lebanon
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
saudi arabia
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
kuwait
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
other w asia countries
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
ideas from other regions
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
ideas from other regions financial
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
policy recommendations
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?