Polish and Hungarian SMEs facing the crisis Paper presented by Karoly Attila Soos Senior Research Fellow Institute of Economics CERS HAS 3 rd Annual IE-SEBA Workshop Beijing, October 26-27th, 2012

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 in last years ) stronger than in Poland

Low prod- uctivity 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 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 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/ , 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 (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 Domestic credit to the private sector (% of GDP) Poland Hungary Banks’ nonperfoming loans to total gross loans (%) Poland Hungary Table 1. Total outstanding domestic credit and nonperforming loans of banks in Poland and Hungary Source:

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 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

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. Other anti-crisis policies: Hungary

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.

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. Conclusion (contd.)