Gary Kleiman of Kleiman International -
Two weeks after the snap elections on November 1, Turkey will host the summit for the G20, for which a major theme under its presidency has been financing options for small business.
The former Turkish deputy prime minister Ali Babacan, who was due to leave parliament under a three-term limit, has championed the cause of small and medium-sized enterprises (SME), and was brought back into the interim government to manage the event. At a preparatory meeting in Antalya in September, member countries agreed to launch a World SME forum in conjunction with the World Bank, where the private sector-oriented International Finance Corporation already has a dedicated finance facility. In the past year, the Turkish parliament has also passed legislation to allow tax deductibility for raising equity as well as debt, and to overhaul the venture capital framework.
The push was motivated by the Organisation for Economic Co-operation and Development’s (OECD) latest report on the gloomy bank credit climate, covering a half dozen Central and Eastern European states along with Turkey, which recommended broader non-bank and securities alternatives. However, progress will be stymied as long as mainstream financial market performance and institutions and other structures continue to suffer in the region, and redressing these weaknesses should be a summit priority.
The OECD’s 2015 “scorecard” relies on data through end-2013, and finds that regulatory reform and economic slowdown have crimped small business lending since the 2008 global crisis. Official emergency programmes since then have increased borrower leverage as real interest rates spiked, and start-up companies have been shut out altogether. Non-banks and private investors can help plug the gap, and leasing and factoring are popular in Europe, with a 2014 European Central Bank survey showing half of firms have used or considered using the former technique. Corporate bond participation was less than 5% in the poll due to the high cost and level of disclosure, and private placement markets for sophisticated investors were unavailable. Loan securitization was decimated by the US mortgage-backed collapse, although new EU rules are being prepared to revive it on a minor scale. Venture capital is active among OECD members, but has not returned to pre-crisis levels despite tax and training incentives. Public share listings through specific small-cap markets, as in Poland’s New Connect platform, have not caught on generally with demand and supply constraints. Business owners lack confidence and education, and post-offering liquidity is low, the report noted.
In 2013, SME payment delays dropped and the bankruptcy record was uneven in the 35 countries reviewed by the Paris-based agency. European bad loans surged and governments tried to offer relief with guarantees. Long-term facilities were slashed and interest rate spreads widened relative to large firms. Half of credit was collateralized, and loan rejection rates were 30-50% in several emerging market cases. Stock market launches were mixed, but leasing growth was a bright spot, and the OECD predicted strict financing conditions lasting through 2015.
These trends were reflected in individual Emerging Europe profiles for the period. The Czech Republic responded with a 2014-2020 SME support strategy focused on guarantees for exporters. Estonia, with 80% of the workforce in micro-enterprises, had a “depressed” venture capital market that the government addressed with start-up and subordinated loans. It also joined with its neighbours and the European Investment Bank for a €100mn Baltic Innovation Fund. Hungary counted over 600,000 businesses in the category, and the government's Funding for Growth programme started in mid-2013, which channels zero cost credit lines to domestic banks for on-lending at a maximum 2.5% margin, continues as a major effort. Russia’s Vnesheconombank has an SME Bank subsidiary that targets energy, manufacturing and innovation projects, and a credit guarantee agency was established in 2014. Serbia adapts the EU definition so that over 99% of companies meet at least two of the three eligible criteria: a cut-off of 250 employees, €10mn annual turnover and €5mn in total assets. A Serbian finance ministry fund provided startup and working capital lines at a 3.5% rate cap, and exporters also got discount commercial risk insurance.
Turkey’s Financing Growth task force, organized by the business leaders’ grouping B-20, tabled proposals in September under the broad headings of improved data availability and market access. It hailed the country’s central credit bureau founded two decades ago, which serves a wide range of banks and specialized lenders, as a rating and scoring model to follow. The panel urged expansion of official guarantee programmes and balance sheet equity tax relief. And said global supply-chain sourcing could be adapted, and “crowd funding” through the internet should be explored. Leasing needs stronger judicial frameworks and Islamic finance instruments could allow for greater risk-sharing, according to the pre-summit document. On venture capital, the policy paper appealed for deal standardization and tax breaks, and further SME securities market development to offer investment exit.
However, capital markets otherwise are barely mentioned in the report, and the thrust is on increased loan securitization as a supplemental issue, and on lessons from developed economy experience rather than strengthening emerging market practice. It calls for customized stock exchange listings with reduced reporting and fees on a national and possible regional basis, but is silent on bonds and the institutional investor base needed to absorb portfolio risks.
Turkey and the rest of Emerging Europe should look to their own history of the launch and deepening of market reforms, and recognize that core underpinnings have been slipping for years and contributing to underperformance as well as SME finance bottlenecks. Contractual savings pools have never reached critical mass, and private pension funds either have been delayed or dismantled.
The G20 did not exist when emerging financial markets first burst onto the scene decades ago, and the upcoming meeting should commit to a new generation of reforms that can benefit all sizes of companies.
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