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Crisis response: “Small businesses are the key to recovery”

By Mike McDonough

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Small businesses are the key to recovery in Romania

Credit lines are helping south-eastern Europe bounce back from the worldwide economic downturn. 

The EBRD’s response to the financial crisis has kept the Bank's Financial Institutions (FI) team particularly busy over the last nine months. Senior Banker Alexander Tanase, who is country coordinator for Romania, Serbia and Moldova in FI, speaks about the work the EBRD is doing in these countries.

What have been the main crisis response projects targeting FIs in the countries you manage?

Shortly after the crisis erupted, the EBRD signed a deal for a €100 million loan to Banca Transilvania in Romania. The loan, which was fully disbursed in December 2008, is aimed at helping the client to continue providing loans to small and medium enterprises (SMEs). In March 2009, the EBRD agreed to lend the same amount of funds to another Romanian bank, Banca Comerciala Romana (BCR), under another SME credit line. Half of this loan has been disbursed so far.

In May 2009, the Bank signed a deal with UniCredit Group to provide financing worth a total of €432 million to subsidiaries in eight different countries. Of this, €30 million will go to UniCredit’s Serbian branch, UC Bank Serbia, for on-lending to SMEs. Some €10 million of this amount has been disbursed. And finally in Moldova, the EBRD is considering lending up to €20 million to Moldova-Agroindbank (MAIB), again for lending to SMEs. Additional important SME credit lines, for other partner banks and non-bank financial institutions, are under preparation in all three countries.

How badly have these three countries been hit by the financial crisis?

They have all been affected. For instance, in Romania, the first quarter of 2009 saw a GDP decline of over 6 per cent and in Serbia it was down 3.5 per cent. In the banking sector, this is reflected primarily in the larger proportion of non-performing loans that we are seeing as compared to previous years. We also saw a run on deposits last year, particularly in Serbia in October. About €1 billion was taken out of the banking sector. A lot of this money has returned but deposits are not yet back to previous levels.

How have SMEs been affected?

There has been a clear slowdown in lending to SMEs for various reasons. Because of the credit crunch, banks don’t have access to long-term funding from the international capital markets, parent banks or international financial institutions in the way they used to. Funds are much more expensive and lending is riskier because of the greater chance of default. The slow-down in exports to Western markets and rising unemployment mean there is less demand for products from the SME sector. So they are more likely to fail and default on their loans than before the crisis.

At the same time, another significant factor (amongst many others) is the state of the housing market, which was also affected by a decrease in mortgage lending. This market has a deep impact on the whole economy because the construction industry affects many SMEs such as service providers, builders, engineers, plumbers and electricians. If construction isn’t working, almost everything could potentially be blocked in horizontally-integrated economies.

Also, in some countries, state budgets have not been approved in time and governments have been unable to pay companies for the services they have provided. Finally, in all three countries, there were important in-flows of money from abroad in the form of remittances. These inflows have declined in all countries, but for smaller countries like Moldova (and in a way Serbia), this could have a serious impact on the whole economy and on the SME sector in particular.

Why is the EBRD’s crisis response focused so strongly on supplying credit to SMEs?

It is vital to keep the credit lines open for the real economy that delivers services and creates jobs. If one wants to restart the economies in Romania, Serbia and Moldova – as well as in many other countries in the region – it will be through SMEs. The whole economy will restart if the SME sector gets out of trouble. This is especially true for countries with a surplus of manpower such as Moldova. Relaunching SMEs means a large part of the population gets involved, increasing employment, raising purchasing power and producing more demand for the SME sector’s services and products. Otherwise, one alternative for many of these skilled workers may be to go abroad.

Given the huge funding needs of banks in the region, how far will EBRD financing go to helping the SME sector in these three countries?

We cannot and should not compete with and/or replace the parent banks such as UniCredit or Erste (BCR’s parent bank) to give just a few examples. We can’t replace the billions of euros in funding they have committed to their subsidiaries in the region. EBRD funding does, however, give a strong signal that we still believe in the SME sector and it gives confidence to parent banks and to other investors to remain or to come back to the region. This is one of our key roles. Our commitment to our countries of operations, including Romania, Serbia and Moldova, is beyond any doubt.

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