Q: How does EBRD perceive the small businesses sector in Romania in 2016? What are the risks and the challenges? How does EBRD define ‘small businesses’ and how does it support this sector in Romania?
Matteo Patrone: A vibrant small and medium-sized enterprise (SME) sector is a vital ingredient for a healthy market economy. In Romania, as many other countries, SMEs play a key role in GDP growth and creating added value.
Our recent survey conducted with the World Bank found that difficulties in accessing finance are perceived as among the top three obstacles to doing business. In addition, SMEs also face challenges in accessing the knowledge, information and skills to improve their performance, often in business environments in which they are more vulnerable to issues of corruption, bureaucracy and political instability.
At the EBRD, we believe that improving the agility of the SME sector and its ability to respond effectively to new developments can contribute to building long-term resilience into the economy as a whole.
In Romania, the EBRD is committed to stimulating sustainable, commercial lending to SMEs that have lacked access to finance, with a particular focus on regional disparities, rural areas and financial inclusion. More specifically, the Bank is working to re-energise bank lending and non-bank financing. We use various financial instruments: local currency financing, dedicated frameworks and credit lines (including for energy efficiency and agriculture), and other suitable instruments, including possible risk-sharing.
Also, the Bank promotes adoption of good standards of management practices, financial transparency and integrity best practices via its dedicated Advice for Small Businesses programme, all while seeking to enhance productivity, sustainability and energy and resource efficiency.
Q: Compared to the past experiences during the crisis, does the current environment (the low oil price, the talks about the Brexit, the geo-political conflict in Ukraine) add some pressures/ opportunities for the small businesses in Romania?
Matteo Patrone: It is probably too early to assess the full impact of Brexit on real economy in Romania and in Europe in general. If we want to draw a lesson from other recent events, it is one of mixed outcomes. Most of the EBRD’s countries of operations have benefited directly from the decline in oil prices through reduced bills for energy imports and improvements in their terms of trade (that is to say, the average price of their exports in terms of the average price of their imports).
On the other hand, the economic outlook has been negatively affected by the increased geopolitical uncertainty in the region (the conflict in Ukraine escalated repeatedly in the second half of 2014 and 2015; the sanctions imposed on Russia, combined with uncertainty about their possible escalation in the future). The weaker export environment and deteriorating market sentiment that have resulted from these tensions have all but offset the benefits of declining oil prices.
As a result of the financial crisis and difficult environment in the financial sector, financing for SMEs in Romania is limited, particularly in rural areas and outside major cities, and for small agricultural enterprises. Lack of eligible collateral has constrained the flow of credit, particularly to SMEs, of which more than 80% rely on self-financing, through retained earnings or sale of assets and loans from shareholders or capital increases.
As a result, SMEs generate less than 50% of the total value added of the business economy, compared to the EU average of almost 60%. Increasing non-collateralised lending to SMEs thus remains a challenge and, generally, domestic credit to the private sector as a percentage of GDP is relatively low by regional standards.
Q: Should companies in Romania take for granted the low interest rates environment in the EU? What are the risks and how can they protect themselves?
Matteo Patrone: The low interest rate environment should continue to stimulate the financial sector for the time being. It is crucial that companies, especially those with a limited exposure to export markets, naturally hedge their foreign risk by financing themselves in local currency.
Moreover, there is ample room for improvement in the process of diversification of sources of financing, for example through private equity. Private equity, further than finance, provides corporate governance and managerial support to the growth process of SMEs. Prospectively, this will create incentives for capital market deepening, as companies that will have reached critical mass turn to public equity for financing their future stages of expansion.
Q: What are the lessons learnt by small businesses from the past crisis? How could they use this knowledge in the new economic cycle?
Matteo Patrone: The main lesson learnt by all companies, particularly by small ones, is that the real market out there is much tougher that the one they knew before the crisis. To stay on that market, they have to be competitive, to innovate and keep their businesses flexible and easily adaptable to the permanent market changes.
Q: What industries does EBRD support in Romania and how are the companies that EBRD works with spread across Romania (Bucharest vs. the rest of the country)?
Matteo Patrone: The EBRD is a leading institutional investor in Romania. The Bank has invested over EUR 7 billion in the country to date and has also mobilised more than EUR 14 billion from other sources of financing. The large majority of the EBRD investment has been in the private sector – 62%. The current portfolio is close to EUR 2 billion, 34% in infrastructure, 29% in industry, commerce and agribusiness, 25% in energy and 12% in financial institutions.
Through its Advice for Small Businesses team, exclusively dedicated to SMEs, the EBRD has enabled more than 650 enterprises to access business advice through local consultants and international industry advisers. The great majority of these are located outside the capital city, and more than 20% are in rural areas.
The 2015-18 strategy builds on a strong history of investment in Romania and sets out three priorities:
- broadening access to finance by inducing lending and developing capital market;
- reducing regional disparities and boosting inclusion through commercialized infrastructure;
- enhancing competitiveness in the private sector through targeted investment.
Q: Are there any tools for measuring the impact of EBRD on Romanian companies (such as effects on job creation, financing, business development and so on)?
Matteo Patrone: We believe that measuring the impact of our assistance is very important. As an example, the support provided by the EBRD to over 650 small and medium sized enterprises through its Advice for Small Businesses team, active in Romania since 1993, has had a substantial impact, as revealed by project evaluations one year after project completion . Within a year of completing an advisory project:
• 62% of the SMEs we worked with have increased their turnover, with a median increase of 31%;
• 55% have increased their productivity, as they expanded their business;
• 52% saw significant job creation;
• 16% secured external funding to finance their growth, with over €17 million secured so far.
Data collected since 2008.