SME policy response speed, critical to economic recovery
A webinar recap
The SME Finance Forum hosted a webinar in partnership with the OECD to launch their new report, Financing SMEs and Entrepreneurs 2020: An OECD Scoreboard. This OECD flagship publication, now in its ninth edition, tracks developments for 47+ countries around the world.
Opening the webinar via video, Angel Gurría, the Secretary-General of the OECD, spoke about the effects of the COVID-19 pandemic on small businesses. With OECD estimates of annual GDP growth dropping in many countries by as much as two percentage points for each month of strict lockdown, Gurria contended that small businesses are the most impacted. He stated that the liquidity issues triggered by the pandemic would cause many SMEs to close unless provided some traditional government interventions and alternatives to support small businesses, the ‘backbone of our economy.’
Miriam Koreen, the Senior Counsellor on SMEs at the Centre for Entrepreneurship, SMEs, Regions, and Cities of the OECD, shared an overview and history of the report. While open to any country, this year, 48 countries participated in the ninth edition, working through a network of institutions as nominated by their governments. The goal is to help policymakers monitor what is in their SME finance community and make evidence-based policy decisions. While the report covers data from the end of 2018, it was updated to include the latest outbreak of Covid-19 as much as possible.
They found that growth in SME lending was stalling, even before the COVID-19 outbreak, despite generally favorable financial and credit conditions. SMEs were turning to alternative financing instruments, including online finance, leasing and hire purchase, factoring and venture capital with China, the United Kingdom, and the US dominating the market for alternative finance. With this diversification of financial instruments, SMEs were in a relatively good position going into the pandemic. Still, this buffer is not expected to be enough for many small businesses to weather this pandemic without government intervention. In the run-up to the pandemic, some of the emerging policy developments were credit guarantees, the most widespread instrument to support SMEs, as well as an increased focus on equity finance, with trends in open banking initiatives, and increased support to fintechs.
Lucia Cusmano, Acting Head of the SME and Entrepreneurship Division at the OECD Centre for Entrepreneurship, Small and Medium-sized Enterprises, Regions and Cities (CFE), spoke more specifically about the impact of COVID-19 on SMEs. Small business owners are living through something unprecedented in history, so the full scale will only be evident as the containment measures evolve, and countries go through the post lockdown phase. SMEs are at the epicenter of the pandemic: 50% of SMEs are already experiencing revenue drops, and the capacity to survive may not go beyond two-three months and less. Even if not directly affected by dropping demand, SMEs may not be able to adopt online, e-commerce, telework, or home-based work solutions. The crisis is transmitting through SMEs who are dealing with plummeting demand, labor supply challenges, disrupted local and global supply chains, and disrupted networks.
She also shared the sequencing of SME policy responses and how governments have responded to the urgent issues for small businesses. Governments have reacted rapidly by providing health information to support SMEs, but also by prioritizing the second most urgent demand- addressing the liquidity crisis. The cash and credit shortages are high in most sectors, so many governments have suggested or mandated payment and debt moratoria such as deferring tax, rent, and utility where feasible. Governments are also enhancing access to credit for SMEs and providing some grants and wage subsidies to address staff redundancies and layoffs. After the financial crisis of 2008, governments are quick to implement some instruments enacted to deal with that economic downturn, with loan guarantees being the most deployed. Still, direct loans, grants, and equity are also playing an essential role in supporting SMEs.
Closing out the discussion of the OECD’s findings, Miriam Bruhn, a Senior Economist in the Finance and Private Sector Development Team of the Development Research Group at The World Bank, shared some closing points based on the research of past crises in Sri Lanka and Mexico. Essentially, she reiterated that the role of the government is vital as with no government support, economic recovery takes much longer, where the speed of the response is critical.
If you are a member of the SME Finance Forum, you can access the slides and the recording in this link.