Presentation on theme: "SMEs in Ireland: Contributions, Credit and Economic Crisis"— Presentation transcript:
1 SMEs in Ireland: Contributions, Credit and Economic Crisis Fergal McCannIrish Economy Conference, Dublin 1st FebruaryDisclaimer: The views expressed here do not represent the official opinions of the Central Bank or Ireland or the ESCB
2 Domestic demand and particularly investment have fallen severely and are just showing signs of stabilising. (Source: CSO Quarterly National Accounts)
3 2: SMEs in the real economy and the distribution of economic activity
4 The distribution of private sector employment (Source: CSO - CIP and ASI; Excludes Agriculture and Construction)SMEs are very important in private sector employment (72%)Domestic demand is crucial for employment (64%)
5 Different picture for Gross Value Added – the international sector is much more important. (Source: CSO - CIP and ASI; Excludes Agriculture and Construction)SMEs account for 52% of GVADomestic demand accounts for 33%
6 Exports and employment are not strongly related – “export-led recovery” as employment recovery???
8 Direction of SME new lending – to which sectors is new lending going Direction of SME new lending – to which sectors is new lending going? 4-quarter average figures to Q Key message – SME lending is realigning away from Real Estate lending (although share of stock of credit remains large at ~50%
10 NB: “losing” sectors employ large amounts of people: Construction 98kWholesale & Retail (including Motors) 330kHotels & Restaurants 145k
11 SME Gross New Lending is not growing since 2010 (Source: Central Bank; Money, Credit and Banking Statistics)
12 Given economic contraction, some correction to credit conditions was necessary and inevitable. Has the pendulum swung too far? Credit decisions, 2007 and 2010, Eurostat Access to Finance
13 The price of credit for SMEs – impact of deposit competition (in reaction to sharp fall in external funding) on lending spreads for SMEs?Covered banks offer higher deposits from 2010 onwards Increased spreads for small firm loans are driven by covered banks over same period.
15 Supply and demand side factors are both at play in Ireland Banks’ balance sheet problemsHigh losses on non-performing loans and a need for more sustainable assets to liabilities ratio can lead to credit rationing.Changes in risk aversion post-crisis.Borrowers’ balance sheet problemsHigh arrears, excessive debt levels and decreased creditworthiness can lead to loan rejection.DemandExcessive existing leverage – incentive is to lower borrowings, not accumulate more debt.Lack of aggregate demand for their output.Decreased investment and growth opportunities.Similar to Stiglitz and Weiss (1981) we mean credit rationing as the excess demand for loanable fundswhich is not satisfied as “banks deny loans to borrowers who are observationally indistinguishable from thosewho receive loans.”
16 Balance Sheet Recession? (Source: Macro Financial Review, Central Bank) NB: MNCs account for large share of these numbers.Disaggregate data unavailable for SMEs or indigenous firms.Cussen and O’Leary (2012) highlight that 47% of GVA of Irish NFCs is from foreign firms.as a % of financial assets, Irish NFC debt is one of the lowest in Europe (under 50%).Almost 50% of NFC debt in Ireland is with non-resident lenders. MNC debt.
18 Demand: Net % increase in need for external finance is falling; but remains around euro area average Data: SAFE Survey up to wave 7 (Sept 2012)
19 Sources of weak demand: investment demand is low, but is offset by above-average demand for working capital. Unknown: how much smaller are lending volumes for Working Capital?
20 Pattern reflected in Red C survey Mar-Sept 2012 Pattern reflected in Red C survey Mar-Sept “Reasons for making financial request”
21 A balance-sheet explanation for decreased lending: Negative relationship between new lending and 90-day arrears rate in a sector (Source Central Bank of Ireland lending data).
22 Expected bank rejections – Across euro area, the risk-adjusted coefficient on bank rejection responds to the macro economy…Stronger Domestic Demand Lower Pr(Rejection)More indebted private sector Higher Pr(Rejection)
23 Competition among banks is decreasing since 2010 – potentially negative implications for price and access to credit for SME
24 Credit Rejection (% of applicants) – Mazars/Red C reports improving rejection rates. Still unfavourable in terms of European ranking. Data: SAFE survey, up to Wave 7 (Sept 2012)
25 Changes in Other Terms and Conditions – Ireland and other peripheral countries still have most unfavourable patterns.
26 SummaryThe Irish economy is experiencing the aftermath of a credit-induced property boom.Banks suffering losses and need to shrink balance sheets. Bank competition decreasing.Firms over-leveraged; aggregate demand weak; zero fiscal space.The credit market is exhibiting the symptoms of this stress:Sectors with higher loan arrears are receiving less new lending.Countries in Europe with weaker demand or higher leverage have higher probability that SMEs are rejected for credit.The demand for financing does not appear below-average in Ireland. Demand for investment financing is certainly weak in Ireland. Still not enough information on volumes.There is evidence that Irish SMEs are experiencing credit constraints, beyond that predicted by the weak economy here, inPositives:Credit constraints appear to have reached their most severe in 2011.Property prices, GDP and GNP stabilisingGovt. measures; NPRF €850M investment – fill funding gaps for firms, free up bank capital.
27 References to sources for this talk. Central Bank of Ireland. Economic Letter - Vol 2012, No. 8 Irish SME credit supply and demand: comparisons across surveys and countries - Sarah Holton and Fergal McCannCentral Bank of Ireland. Economic Letter - Vol 2012, No. 4 Bank competition through the credit cycle: implications for SME financing - Fergal McCann and Tara McIndoe-CalderCentral Bank of Ireland. Research Technical Paper 04RT12 Firm Credit in Europe: A Tale of Three Crises by Sarah Holton, Martina Lawless and Fergal McCann.Bank balance sheet repair and credit provision: Insights from the Irish bank deleveraging experience. Jane Kelly, Reamonn Lydon, Martin O'Brien, Fergal McCann. Mimeo, Central Bank of Ireland.Credit Access for Small and Medium Firms: Survey Evidence for Ireland by Martina Lawless and Fergal McCann. Forthcoming Journal of SSISI