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3rd Annual IE-SEBA Workshop
Beijing, October 26-27th, 2012
Polish and Hungarian SMEs
facing the 2008-2010 crisis
Paper presented by
Karoly Attila Soos Senior Research Fellow
Institute of Economics CERS HAS
Starting points
• In Poland and Hungary, the activity of small
entrepreneurs was tolerated already before
the political turnaround of 1990; in the 1980s
already it was even supported
• The Polish population displays more
propensity to entrepreneurship than the
European Union average;
• In Hungary, government support for small
entrepreneurship is (was
stronger than in Poland
in last years)
Low productivity
Relatively high
productivity
Competitiveness
Hungary more vulnerable to crisis
• Its public debt was 72.3 percent at the end of 2008, as
compared to Poland’s 47.1 percent
• The Hungarian economy was more dependent on
international trade and finance than the Polish: the
cumulative share of merchandise exports and imports
in the GDP measured at purchasing power parities was
in 2008 91.2 and 47.8 percent in the two countries,
respectively
• Businesses’ and households’ borrowing in foreign
currencies was heavier in Hungary. At the end of 2007,
the share of foreign currency loans granted by the
Hungarian banking system reached an alarming 57.1
percent; this figure was only 23.7 percent in Poland.
Hungarian policy in strait-waistcoat
• When, in October 2008, the crisis arrived to central
Europe, the floating currencies of several countries,
including the Hungarian forint and the Polish złoty,
depreciated rapidly. The Polish central bank began to
reduce its basic interest rate in November in order to
ease business conditions. This rate was reduced
gradually from 6 percent to an all-time low of 3.5 by
July 2009. Polish competitiveness improved.
• The Hungarian forint’s depreciation – even though it
also helped companies exporting and those facing
import competition – was deemed a dangerous
development. The central bank had to raise its base
interest rate and it could only reduce it later gradually
(reaching again the starting 8.5 percent in July 2009).
Budget deficit also had to be kept under strict control.
Polish growth performance
was, of course, much better but
small firms had hard times
• In 2009, Polish GDP +1.7%, Hungarian -6.7%.
• Polish GDP 2010/2007 +10.6, Hungary -4.9%,
European Union -2.0
• The share of Polish exporting microenterprises
diminished from the already low 6% to 4 between
the 1st half of 2008 and 2010. (EU average 24%)
The role of foreign ownership
• However, micro-enterprises are mostly locally owned.
In the sample of Hungarian companies polled for the
Chamber of Industry and Commerce in 2010, 3, 11 and
32 percent of the micro-, small and medium-sized
companies had foreigners among their owners,
respectively.
• The lack of foreign owners deteriorates most indicators
of the enterprises. E. g., in 2010 among all polled
SMEs, 18 percent of those having (minority or
majority) foreign owners expected to increase the
number of their workers in the near future; the
respective figure for locally owned firms was only 10
percent.
Illiquidity, bankruptcies,
liquidations
• Bankruptcies and liquidations became more
frequent in both countries
• The illiquidity of firms, particularly small ones
became a serious problem, particularly in
Hungary, in certain sectors, like the
construction industry.
Bank loans
Table 1. Total outstanding domestic credit and nonperforming loans of banks
in Poland and Hungary
Domestic credit to the
private sector (% of GDP)
Banks’ nonperfoming loans
to total gross loans (%)
Poland
Hungary
Poland
Hungary
2007
44.6
59.5
5.4
2.8
2008
55.0
67.3
4.7
3.3
Source: http://www.ebrd.com/pages/research/economics/data.shtml
2009
55.2
66.5
8.0
6.7
Bank loans (contd.)
• Hungarian SMEs are largely credit constrained
but their loan requests also diminished.
• The amount of newly approved credit to
Hungarian SMEs was 3,592 billion forints
(corresponding to 13.4 percent of the GDP) in
2009, shrinking by 17 percent from its level of
2008.
• Poland: because of the low share of foreign
currency loans, the deceleration of bank
lending can be observed better.
Anti-crisis policies:
finances
• No loosening in budget in Hungary, little loosening
in Poland
• Restructuring some expenditures in favour of firms
in Hungary, in favour of firms and local governments
in Poland.
• Helping the fonctioning of banks with public loans.
• Polish microfinance institutions also received public
financing
Other anti-crisis measures: Poland
• Deregulation measures easing the functionong of
firms were introduced by the Polish government
• With these measures, according to the World
Bank’s „Ease of doing business”, Poland had a
positive achievement: it had been72th among 183
countries on the basis of data of 2008; two years
later its ranking became 70th. Significant
improvements were measured at starting a
business and the tax and tax administration
burden
Other anti-crisis policies: Hungary
• Hungary, which was downgraded in the same period
from the 41st to the 46th place in the doingbusiness
evaluation system, might say that being 46th is still
better than being 70th, and our set-back in ranking had
been the consequence of others’ improved
performance, rather than that of some enhanced red
tape or other systemic backsliding in this country.
• However, losing position in a competition for assuring
better business conditions than those yielded by other
countries is certainly a bad performance. Anyway, the
frightening depth of the crisis in Hungary may have
discouraged the government from the implementation
of more radical reforms.
Conclusion
• It would be difficult to measure the exact size of the
damages that the crisis caused to the SME sectors of
Poland and Hungary are not yet known. What seems to
be certain is that the crisis did not have any significant
positive impact on these component parts of the Polish
and Hungarian economies. Generally speaking, positive
impacts of a crisis are normal phenomena. More
specifically, the reactions of those – in our case
entrepreneurs and their companies – enduring the
crisis may shift their activities to new, maybe more
difficult, even more risky but also more promising,
dimensions. However, for durable positive changes in
the field of small entrepreneurship in our countries, the
reactions of the entrepreneurs themselves, even
coupled with the crisis treatment activities of the
government authorities, are far from sufficient.
Conclusion
(contd.)
• And what is more, from a long term, strategic point of view
much of the observed crisis treatment is beside the point.
Namely, financial assistance granted to SMEs and even any
artificial creation of demand for their products and services
are unsustainable not only for the Hungarian but also for the
less indebted Polish public purse. For a hint towards the
solution let us recall the rankings of both countries with
respect to various important conditions of business activities.
At the middle of 2010, the researchers of the World Bank
found that in the “ease” of dealing with construction permits
Poland was among the worst of all countries observed (164th
of 183). The Polish record was little better in the field of
enterprise taxation and with respect to the conditions of
starting a new business(121th and 113th respectively).
Hungary also had some similarly scandalous rankings (it was
120th in investor protection and 109th in enterprise taxation).
• I. e., there remains headroom for improving governance in
both countries.