Friday, December 13, 2013, 06:55
Asia Weekly: Gathering storm
By Alfred Romann in Hong Kong

Optimism among Asian SMEs dwindles as accessing finance and credit becomes more difficult, stifling their ability to grow

Asia Weekly: Gathering storm
A small store selling accessories in Singapore. There are some signs that SMEs in the city-state are regaining confidence, although they remain less optimistic about growth than in previous years. (AFP)

Pessimism is setting in among small and medium enterprises (SMEs) across Asia, many of which face difficult operating environments, challenges accessing finance and more competition from large conglomerates.

Any weakening of the SME sector in just about every country in the region could have significant implications for national and regional economies. As a group, they are the single largest employers and the largest contributors to economic output.

“(SMEs) are the largest contributors to GDP for middle-income and high-income countries,” says Zhuang Juzhong, deputy chief economist at the Asian Development Bank (ADB).

They are also large contributors in low-income countries, even if the figures in those are harder to compute.

SMEs account for 99.7 percent of all enterprises in Japan and 99.9 percent in South Korea. They also account for about 99 percent in China. More importantly perhaps, they are responsible for almost 70 percent of jobs in Japan, 87 percent in South Korea and about 75 percent in China along with about half or more of all economic output.

“This is how important SMEs are for Asian economic growth,” says Zhuang.

But despite this importance, SMEs are finding only limited cause for good cheer. Across Asia, optimism among small and medium SMEs has dropped significantly over the past couple of years, according to a survey by accountancy organization CPA Australia.

“Global economic uncertainty is having implications across the Asian region,” said Gavan Ord, a policy adviser for CPA Australia, as he released the results of the fifth Asia Pacific Small Business Survey.

The body reached out to businesses in Australia, New Zealand, Singapore, Hong Kong, Malaysia and Indonesia. In all these markets, confidence this year is down from 2012. In Hong Kong, its links to China notwithstanding, confidence has dropped steadily since 2010 and is now in negative territory.

Even Indonesia, which has the most confident businesses of the group, has seen declines since 2011. This year, only 56 percent of SMEs polled expect the economy to grow compared to 85 percent last year, and less than 70 percent expect their businesses to grow compared to more than 90 percent just two years ago.

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In Malaysia, the drops are significant as well, with less than 40 percent of businesses anticipating growth compared to close to 80 percent in 2012.

Of the 78,000 registered companies in Malaysia, 98.5 percent are SMEs. They have less than 200 employees and turnover of less than 50 million ringgit ($15.5 million) per year.

Despite their number, their contributions to the economic growth are smaller than in developed economies. Speaking earlier this year, Malaysian Deputy Prime Minister Muhyiddin Yassin said SMEs account for 31 percent of GDP and as much as 59 percent of jobs. In most developed countries, SMEs account for between 40 and 60 percent of GDP.

This could mean that SMEs are less efficient or that they are working through the difficult early stages of growth, according to Glenn Levine of Moody’s Analytics in Australia.

The challenges that SMEs face are also quite visible in Indonesia, which has some 55 million of them, according to the International Finance Corporation (IFC), a member of the World Bank. More than 54 million of these are microenterprises, a single person selling some kind of good like street food. Fewer than a third of small businesses in Indonesia have access to finance, according to the IFC.

Lack of finance hinders growth and, as any accountant will attest, the business that is not growing is dying.

In November, the IFC signed a loan agreement for $75 million with Bank Danamon Indonesia to create business opportunities for SMEs. This facility may have some small impact on access to finance.

On paper, it is easier to start a business in Asia than just about anywhere else in the world. Singapore and Hong Kong typically top the World Bank’s annual Ease of Doing Business Index.

In this year’s survey, released in June, the World Bank ranked Singapore first and Hong Kong second. Malaysia is sixth and South Korea seventh. Taiwan is at 16 and Thailand 18.

After that, it gets much harder. Japan comes in at number 27 and the next country on the list is Brunei, at 59. Interestingly, Brunei is ranked 137 in terms of “starting” a business. China comes in at 96.

Doing business in some of the region’s emerging countries is relatively difficult. Vietnam is ranked at 99 and the Philippines at 108. Indonesia, despite the government interventions, comes in at 120, below El Salvador and Jordan. Cambodia is 137 and Laos is 159. Myanmar is 182, just below Venezuela.

Getting finance or credit is much harder than these statistics suggest. With the exception of Malaysia, which is ranked first in terms of accessing credit, other countries in eastern Asia are ranked much lower. Taiwan and Thailand are tied at 73. Indonesia is at 86.

In other parts of south and west Asia, business environments are a mix. Kazakhstan comes in at number 50 in terms of ease of doing business but it is ranked 86 in access to credit. India is ranked at 134, even if credit is much more accessible. Pakistan is ranked at 110.

The lack of finance may be a remaining side effect of the global financial crisis of 2008, says Levine of Moody’s Analytics. The crash five years ago evolved out of the financial system and was caused, in broad strokes, by the virtual elimination of credit.

History shows that it takes longer to recover from these types of crises than from those caused by other economic issues. The crisis broke the system of finance and cut the flow of credit to businesses around the world.

“This is not just an Asia story. This is a global phenomenon. This is the same issue we are seeing all around the globe,” Levine says. “It shouldn’t be a surprise that the smaller businesses suffered more.”

Despite the gloomy outlook that many SMEs share about the near-term future, there are signs that some kind of turning point is on the horizon. At least in Singapore, there are suggestions that SMEs are regaining their confidence. More of them are likely to invest in technology and assets over the next six months than at any time over the last four quarters, according to a survey released last week by the Singapore Business Federation and the DP Information Group, a provider of business and credit information.

“SMEs know they need to increase their productivity to stay competitive. That’s why they are buying machinery, IT hardware and software,” says Chen Yew Nah, managing director of DP Information. “These investments have the added benefit of driving down costs over time. Investing in better equipment and automation is a sound strategy to combat rising manpower costs.”

The overall capital investment index this quarter came in at 5.45, up from 5.09 a year ago.

But even here, SMEs are struggling to define themselves. Most of them are facing higher barriers than in the past. Banks are less likely to lend and competition from large conglomerates is greater. As a result, many are more likely to cut costs and their productivity to increase profits rather than expand, according to a different report from DP Information, called the SME Development Survey.

Only 7 percent of more than 2,700 businesses surveyed expect to see double-digit growth. At the same time, fewer SMEs are doing international business. Among respondents, 46 percent reported doing business outside Singapore compared to 54 percent in 2012.

In general, SMEs lack confidence and many fear another international shock, adds Chen.

According to CPA Australia, fewer than 20 percent of Singapore businesses expect to grow over the next 12 months compared with around half last year and more than 70 percent in 2010.

But recent signs of global economic growth could help SMEs across the region get some of their confidence back.

“2013 has seen a gradual stabilization in the global economy, as major downside risks emanating from Asia, US and the eurozone subside,” says Ho Meng Kit, CEO of the Singapore Business Federation.

This stabilization should filter down to SMEs, but it could take some time, at least as long as access to credit and finance remains tight, and that may not change for a couple of years yet.

Zhuang, the ADB economist, reports that at a recent conference in the Philippines, a major topic was greater inclusion into the financial system for SMEs, underlining the importance of putting more emphasis on the sector.

Even in countries like Japan and South Korea, famous for their large conglomerates, smaller businesses play a key role. Many SMEs are plugged into national and global value chains by working with larger multinational companies as suppliers or outsourcers. Neither one can survive without the other.

But creating an effective balance requires that governments create the conditions for SMEs to access financial systems.

“Some countries have policies for banks to lend a certain amount to SMEs,” says Zhuang. “One of the priorities for financial sector reform is to promote financial inclusion for SMEs.”

More access to credit would be a first step in reassuring SMEs that their future is bright. Such reassurance would pave the way for SMEs to expand, create more jobs and facilitate economic growth.