SME loans hit new high amid Covid-19 pandemic, OECD says

Increase was underpinned by rise in government loan guarantees and direct lending to companies

People sit outside at a cafe in Berlin. Germany's federal and state governments have agreed to continue relaxing Covid-related measures and restrictions despite record-high case numbers. Getty Images

Outstanding loans of small and medium enterprises in 48 countries surveyed by the Organisation for Economic Co-operation and Development jumped significantly in 2020 — the first year of the Covid-19 pandemic, a report has shown.

The outstanding loan is the debt that SMEs owe to creditors or financial institutions.

The average stock of SME loans surged by 4.9 per cent in 2020, the highest annual increase since the OECD started recording the figures about 10 years ago, the Paris-based agency said in its latest report.

Outstanding loans had grown at an average annual rate of 1.2 per cent during 2015-2019 period.

The increase in 2020 was underpinned by an increase in government-led loan guarantees that rose 110 per cent annually that year, the debt moratoria, as well as direct lending to SMEs, which soared 17 per cent on an annual basis, the report revealed.

The OECD’s latest report offers insights on SME financing trends and policies for 48 countries, including OECD member countries, for the period 2007 through the first half of last year.

“Support measures and favourable lending conditions have left many SMEs with higher levels of debt that will need to be tackled going forward,” OECD Secretary General Mathias Cormann said.

Emergency support measures — including monetary policy interventions by central banks — also pushed interest rates down to record lows, with the median SME interest rate falling by 0.4 percentage points in 2020, the largest reduction since 2009.

In most economies covered by the report, unprecedented support measures also helped avoid a wave of insolvencies.

“The majority of support measures was broad-based and accessible to all SMEs … this enabled most enterprises to continue to operate … bankruptcies declined in the majority of countries in 2020, with the median bankruptcy rate down by 11.7 per cent,” the OECD said.

Alternative sources of finance, which SMEs had been utilising before the crisis, declined in 2020. For example, the drop in both leasing and factoring was “unprecedented” during the pandemic.

“The decline in leasing represented a reversal of the pre-crisis positive trend, while the drop in factoring intensified the pre-crisis slowdown of this activity,” the report said.

“SMEs need better access to alternative financing instruments to reduce their dependence on debt and provide greater flexibility and resilience in these volatile economic times,” Mr Cormann said.

The pandemic, which upended the global economy and shuttered many small businesses, resulted in widespread lockdowns and supply chain disruptions that affected SMEs worldwide.

The global economy declined 3.5 per cent in 2020 as movement restrictions depressed demand and introduced disruptions in value chains. It hit developed and developing countries alike, with almost all economies reporting negative growth, the report said.

Despite the global economy rebounding to 5.6 per cent last year, recovery differs significantly across different countries and is projected to continue to diverge, the OECD, which has 38 members, said.

“Most advanced economies and emerging economies have already reached pre-crisis real GDP [gross domestic product] per capita levels, while other developing countries are expected to reach these levels by 2022,” the report said.

SMEs make a major contribution to the labour market and have the potential to play a key role in driving the green transition and in ensuring energy security. The report said they need access to a broader range of financial tools and instruments to strengthen their resilience.

“SMEs account for the majority of employment and output across OECD economies. They will need to thrive if we are to succeed in securing a recovery that is strong, sustainable and resilient.”

Russia's military offensive against Ukraine will also affect the economic outlook.

While the most important consequences have been the lives lost and the humanitarian crisis associated with the huge numbers of besieged and displaced people, the OECD report said, there are “significant economic implications”.

The economic impact of the conflict is highly uncertain, but as of this month, it is estimated that it could reduce global growth projections by 1 per cent in the first full year after the start of the conflict, while global inflation could rise by close to 2.5 percentage points.

Before the outbreak of the war, most key global macroeconomic variables were expected to return to normal over the course of this year and next.

Global growth was on track to return to pre-pandemic rates in 2023, with most OECD nations hitting full employment, inflation converging on levels close to policy objectives and monetary and fiscal policy settings normalising.

However, that has changed with the recent conflict between Russia and Ukraine, Though they are relatively small in output terms, the two countries are large producers and exporters of key food items, minerals and energy, the report added.