Subsidies to help SMEs survive crisis

Providing subsidies like reduction in taxes and easy access to credit lines will help small and medium enterprises (SMEs) weather the global economic crisis, according to economists.

SMEs, which represent 99.6 percent of all businesses registered in the country, are vital to the Philippine economy. They employ about 70 percent of the labor force.

Victor Abola, economist at the University of Asia and the Pacific, said SMEs really needed support from the government because they have limited funding and access to credit.

“The government should provide assistance to SMEs,” Abola added, also noting that the recently announced stimulus package of P330 billion does not provide any aid for SMEs. “Funding is quite important for SMEs.”

In Vietnam, according to a recent study of the International Labor Organization (ILO), some $1 billion in stimulus package would include covering preferential interest rates on bank loans to SMEs in addition to credit guarantees. Other countries like India, Indonesia, Thailand and South Korea also offer assistance to SMEs.

The ILO said that to help SMEs weather the global crisis, it recommended the provision of fiscal stimulus packages, such as providing credit guarantees, credit lines and preferential credit, reduction in taxes and wage subsidies.

“The main reason for government-backed credit guarantees is that while cash injections to banks may help alleviate the overall credit crunch, lending to SMEs may not improve unless policies are directed specifically toward their needs,” ILO explained.

The ILO also noted that measures aimed at small firms could cushion the social impacts of the crisis on workers and on house-holds—thus, help create consumer demand. “Targeting small firm could have particularly beneficial multiplier effect.”

Another perspective

Rafaelita Aldaba of the Philippine Economic Society said in a study that the supply of funds is not the problem of the SMEs, rather the reluctance of private banks to lend them money. “Government lending programs directed mainly to micro-enterprises and livelihood programs.”

Another challenge is the high cost to access raw materials and inputs because of the general problem of sourcing and transporting raw materials, the economist added.

Under the President Gloria Arroyo’s Medium Term Philippine Development Plan 2004 to 2010, crafted the SME Unified Lending Opportunities for National Growth (SULONG) program aimed to provide SMEs more access to government assistance.

In a 2009 UPS Asia Business Monitor, SMEs in the Philippines were viewed as the “least competitive” in Southeast Asian region because of the high costs of doing business here and of corruption in the bureaucracy and poor regulations.

The Filipino SMEs owners interviewed cited major roadblocks to accessing capital, such as the lack of institutions willing to lend to small businesses and the bureaucracy and red tape in processing loan applications.

The majority of Filipino respondents are seeking better access to capital, financing or loans for SMEs; assistance to education and training; and efficient bureaucracy and regulations to the government.

Despite the roadblocks, 32 percent of the Filipino SMEs polled said that they would hire more workers even amid the downturn. Fifty-two percent of the local respondents said that they would maintain the current number of workforce, while 16 percent would trim the number of their employees.

Some SME statistics

Data from the National Statistics Office showed that a total of 21,217 establishments with average total employment of 20 or more dropped 19.7 percent in 2006 from the 26,407 establishments recorded in 2005.

By sector, the manufacture comprised 23.7 percent of the number of establishments with 20 or more employees.

Manufacturing was followed by the wholesale and retail trade sector with a share of 21.4 percent; the hotels and restaurants sector, 13 percent; and mining and quarrying sector recorded the fewest establishments.

In 2006, the number of people working for firms with 20 or more employees totaled 2,631,889.

Of that figure, the manufacturing sector contributed 37 percent; followed by real estate, renting and business activities sector, 13.6 percent; and wholesale and retail trade with 8.7 percent. –Darwin G. Amojelar, Senior Reporter, Manila Times