Small businesses struggling in the wake of the crisis

Small businesses in Hungary are viewed as the lifeblood of the economy, but they have been badly affected by the global financial crisis. Figures show that around 176,000 businesses have failed to survive the downturn, with SMEs – small and medium-sized enterprises – the most badly affected sector. There has been institutional support for SMEs, but for many the prospects are gloomy. A survey shows companies are continuing to cut costs and are postponing investment.

Background

The effects of the global financial crisis began to be felt in Hungary in October 2008. GDP declined in 2009 by 6.5% (table below) and since then it has struggled to show any improvement according to figures from Hungary’s Central Statistical Office (KSH). The crisis affected the entire Hungarian economy, but small and medium sized enterprise s (SMEs) were particularly badly hit. Businesses in sectors like agriculture, construction and retail have struggled to stay afloat.

According to Tamás Tóth, Managing Director of market research consultancy Opten, research has shown that 176,000 enterprises had failed to survive the crisis in Hungary. He said half of the businesses which existed before the crisis were not operating today. He added that to survive, flexibility and good strategic decisions were needed.

Source: Central Statistical Office, KSH

Significance of small business

SMEs play a significant role in the Hungarian economy. They employ 71% of the Hungarian workforce and are responsible for 55% of GDP. The past few years have seen fundamental changes for smaller companies, including a huge number of liquidations. These have come about partly as a result of the turmoil and recession caused by the financial and economic crisis in Hungary and globally.

In the 1990s, numerous small and micro enterprises came into existence because of high levels of unemployment. However, a significant proportion of those who became self-employed were so-called ‘forced entrepreneurs’, working for employers who had given them bogus civil law job contracts rather than standard employment contracts regulated by the Labour Code. These micro enterprises were not illegal, but they paid much less in tax and social security contributions. Over the years, successive governments have brought in a range of measures to outlaw this type of company and encourage workers to return to legal and regular employment.

In the period between 2007 and 2011, the growth in the number of active businesses in Hungary was 0.3%, much lower than the European average of 5.7%. This shows how bad the situation has become in the country. Adequate funding and support from government for business start-ups has not traditionally been a strength of Hungarian domestic policy.

Survey shows impact of crisis

The economic crisis has affected 87% of SMEs in Hungary according to research by the K&H Bank which publishes its own ‘confidence index’. The research shows 64% of SMEs have initiated austerity measures and 47% have laid off staff as a result of the recession.

The survey of 700 SMEs in Hungary showed 56% had reduced costs and 42% postponed investments. About 28% of the SMEs surveyed cut non-wage benefits, while 25% introduced a shorter work week.

About 84% of SMEs said sales had fallen, while 45% complained about late payments. Around 37% of the SMEs surveyed faced liquidity problems.

Government and central bank initiatives

The Secretary of State for Economic Regulation, Kristóf Szatmáry, has said the Government of Hungary regards SMEs as strategic partners in the battle to boost employment and economic growth. He pointed out that the government had introduced several measures to help them, including raising the 10% corporate tax threshold from HUF 50 million (€600,000) turnover to HUF 500 million (€1.6 million as at 19 May 2014), and the abolition of ten smaller tax types.

In April 2013, the National Bank of Hungary (MNB) unveiled a package of measures under the Funding for Growth Scheme banner, intended to stimulate the growth of the economy by lending to micro businesses and SMEs. If this does make the economy grow, it will also reduce Hungary’s financial vulnerability by lowering its external debt.

The scheme is an integral part of a monetary policy. It has three pillars:

• MNB will provide collateral refinancing loans for its monetary policy counterparties up to HUF 250 billion (€0.8 billion) to commercial lenders at 0% interest; the purpose of this is to extend credit to small businesses at no more than 2% interest;
• MNB will underwrite the conversion of SMEs’ foreign currency loans into local currency loans;
• The Scheme aims to reduce Hungary’s gross external debt and the outstanding stock of two-week MNB bills.

Reaction of employer groups

Sander Demean, Executive Chair of the National Association of Entrepreneurs and Employers (VOSZ), said SMEs needed access to credit and capital to survive. He said VOSZ welcomed the government and MNB initiatives.

Demean emphasised that employment growth relied to a large extent on SMEs, but said businesses needed access to resources. The access to loans promised by the MNB scheme should be supplemented with injections of capital for SMEs from the development funds of the European Union (EU).

László Parragh, Chair of the Hungarian Chamber of Commerce and Industry (MKIK), agreed, saying SMEs needed access to affordable credit. He added that in previous years about HUF 3,000 billion (€10 billion) was lacking in the Hungarian banking sector; most of the money came from SMEs. Parragh also emphasised the need for interest rate subsidies for SMEs.

Commentary

Several studies have reached the conclusion that SMEs are the driving force of the Hungarian economy. Unfortunately, the financial crisis has severely dented this sector, putting the economic future of small businesses and of the entire country at risk.

Innovation and R&D could be a key to achieving future economic prosperity. However, the SME sector lacks innovative thinking and a supportive legislative environment.

According to data released in 2013, there are signs of recovery. In the construction sector, which is mainly driven by SMEs, there are signs of growth compared to the past four or five years.

Máté Komiljovics, Solution4.org