MSMEs are the Achilles heel of the PH economy
A report made available by the Asian Development Bank (AfDB) last week presented the support the Philippines is providing to its micro, small and medium-sized enterprises (MSMEs) sector in a rather unflattering light: among the “Asean- 5 ”, the five largest economies in the Association of Southeast Asian Nations, loans to MSMEs are the lowest in the Philippines by far.
Tracing these results to a logical conclusion reveals a disturbing picture of the fundamental weakness of the Philippine economy, which does not appear to be improved to any great extent by conventional regulatory and policy measures.
In its report titled “Asia Small and Medium Sized Enterprise Monitor 2020”, the AfDB stated that bank lending to the MSME sector in the Philippines in 2019 was $ 11.6 billion (about 568 billion pesos). This was well below the totals of the rest of Asean-5, led by Thailand ($ 218.8 billion) followed by Indonesia ($ 79.9 billion), Malaysia (68.1 billion billion dollars) and Singapore (58.5 billion dollars).
The AfDB further pointed out that despite the law requiring banks to allocate 10% of their loans to MSMEs, Republic Law (RA) 9501, which was in effect between 2008 and 2018, the Philippines has always been in the lagged behind their peers since 2011 (the first year full data was available and compiled). Since 2013, the share of loans to MSMEs in total loan portfolios “has fallen to single-digit percentage,” according to the AfDB report.
There are a few qualifying factors to take into account in digesting the AfDB report. On the one hand, it covers the year 2019. If 2020 was a normal year, the 2019 data would be a much stronger argument, but of course 2020 is what it is. It is not clear that any economic trend established through 2019 will continue in a similar fashion from 2020, for a number of reasons which should be fairly obvious. ADB analysts are probably just as aware of this as anyone, if not more, and so it’s probably best to take their findings as some sort of benchmark.
Second, the Bangko Sentral ng Pilpinas (BSP) took what for a central bank amounts to a radical step in the absence of a clear legislative mandate (RA 9501 expired in 2018) to strengthen support for MSMEs from the start. from the coronavirus pandemic by allowing banks to account for loans to MSMEs against their reserve requirement ratio (RRR), the amount of deposits that banks must keep in reserve to ensure that they are sufficiently liquid or, in non-silly language, have enough money to cover withdrawals.
In addition to the modification of the RRR regulations, the BSP lowered its benchmark interest rates; relaxed some time requirements for reporting overdue and overdue loans; reduced the credit risk weights for these loans from 75% to 50%; and assigned a zero credit risk weight to loans backed by government guarantees, in particular from the Philippine Guarantee Corp., the Agricultural Guarantee Fund Pool and the Agricultural Credit Policy Council.
All of this has significantly boosted lending to MSMEs. At the end of August, according to PASB data, loans to MSMEs stood at around $ 10.8 billion for the year-to-date, which would put them on track for around 16. $ 2 billion for all of 2020, an increase of almost 40% from 2019.
On the other hand…
The positive impact on MSME lending of the PASB’s policy actions has probably been somewhat blunted by the inclusion of new loans to large companies as an ‘RRR surrogate’, a measure that the PASB implemented five days ago. only after giving banks the option on MSMEs. ready. There is no doubt that many banks have taken advantage of this and reduced the amount they might otherwise have lent to MSMEs in favor of lending to larger and more secure borrowers.
The additional amount that banks could have lent to MSMEs if they had not had the opportunity to lend to large companies is questionable. In reality, it could have made a difference of a billion or two dollars; if the question is raised, the PASB rightly points out – albeit a bit on the defensive – that adjusting the RRR is only one of the measures intended to support MSMEs, and that there is Whether or not there were more loans, the sharp increase in MSME loans in 2019 speaks for itself.
This is the real problem, the essential flaw in the whole economy. The BSP by its actions, which are at the limit and perhaps even a little beyond what it can legally and safely do, can only bring the needle forward so far. Even if loans to MSMEs reached $ 18 or 19 billion this year, which would be a startling increase locally, they would still be barely a third of that in Singapore (fourth among Asean-5). The Philippine and Singaporean economies are a apple-to-orange comparison in many ways, admittedly, but it may be worth remembering that the Philippines has about 20 times the population of Singapore, and other asset bases. which are superior in almost every respect.
MSMEs, as we all know, account for around 99.5% of all business enterprises in the country, around 63% of jobs and around 40% of the overall value added to the economy. Lack of proportional access to credit simply delays economic dynamics.
What can be done about it, however, has no simple answer. Banks are reluctant to extend much credit to the MSME sector because the MSME sector is objectively risky. In terms of government intervention, the BSP has probably pushed them about as far as it dares – any more intrusive regulation, and banks are likely to start to fire horns on lending.
The other route of government intervention – direct lending or an expanded framework for loan guarantees – simply transfers the same credit risks from the private sector to the public sector. The extra costs would erode the government’s fiscal position, which would ultimately result in costs for everything else the government does; Having survived the years when national budgets were dampened by debt servicing exceeding 50 percent of gross domestic product, this is not a situation anyone should relish a return to.
The lasting solution, so to speak, is much slower. Building the capacity of MSMEs to reduce the overall risk of the sector, one firm at a time, is the only way to ensure adequate capitalization of MSMEs and promote economic growth without ‘MSME support’ turning into a zero-sum game for someone.