The neglected Philippine SMEs

In the run-up to the Asia-Pacific Economic Conference later this month, the matter of trade and comparative industrialization again takes center stage and, for the latter, ours pales considerably. Allow us to review where our weaknesses lie, specifically focusing on the stages where industrialization should have taken root, but did not. 

It’s a long-standing misconception that has allowed our government’s dereliction a free pass from public accountability and inadvertently rewards bungling officials for doing nothing, even as we find blame elsewhere for the continuing economic injustice, despite the ballyhooed gross domestic productivity (GDP) growth rates that our officials brag about.

We imagine economies like those in the jagged, snow-capped and barely habitable peaks of Mongolia as worse than ours, as the image of Mongolians huddled in stone houses, deprived of simple warmth and basic necessities, pervades.

It is a cliché, perhaps as unreal as our mental picture of Bangladesh, where we imagine poverty prevalent in street gutters populated by reed-thin women and skeletal children, as flies buzz around there, hovering nearby garbage piles that are home to both the Bangladeshi poor and every imaginable plague-carrying pest.

Let us quickly examine similar misconceptions on an economy close to the Russian frontier, where capitalism, as we know it, has not taken root. Kazakhstan, whose economy is closely related to Russia’s, is an oil-producing country. That should make it a wealthy state. It isn’t.

Unfortunately, Kazakhstan bore a severe hit when oil prices fell from $80 to $50 a barrel. Within a year, it downscaled its budgets several times, even as others were impacted positively by the lowered fuel costs and greatly diminished policy rates that benefited their small and medium scale enterprises (SMEs)—a sector integral and indispensable to seminal industrial development.

As incredible as it seems, debunking our misconceptions, these economies, whose GDP growth rates are far less than ours, have done their SMEs far better than we have.

Most startup Philippine SMEs do not have track records and fund support other than single-proprietor equity. Equity funds are, however, natural limiting parameters that dictate the size of the SME and its diminished creditworthiness. Applied as security, cash would be the sole substantial asset more than inventory or fixed assets. Where our banks are afflicted with pawnshop mentalities, few, if any, lend to SMEs without adequate asset backing.

The comparative data on critical capitalization scarcity say it all.

A 2014 Asian Development Bank study on SMEs across Asia shows how our economy, specifically the financial sector, has neglected SMEs, despite the verbosity of government rhetoric and the hype attendant with workshops and trade shows, flea markets and cottage-industry seminars that abound. The study shows that the neighboring economies have each done exponentially better than the Philippines, where bank lending to SMEs is concerned.

Among these, the highest percentage of SME loans to GDP was achieved by Thailand, at 36.6 percent. The lowest was Kazakhstan, at 4.6 percent. Ours was even lower at 3.1 percent. Compared with total loans, Mongolia lent more at 17.5 percent. We lent 10.3 percent. Thailand, which we are often compared with, had a high 34.5 percent.

Access to capital is even more important, where our smallest financial intermediaries surrender to globalization’s capital requisites. Despite statutorily compelled lending to SMEs, an increasing number of rural banks are being hocked to foreign and domestic universal banks. The immediate effect on SMEs is that credit extended gradually disappears, as international lending benchmarks are applied and debtor cash flows fall below requisite minimums.

SMEs provide the critical bridge between unproductive poverty and the initial leap to commercial enterprise. Unfortunately, with a political objective in mind, Malacañang chose ill-conceived cash transfers as its centerpiece poverty-alleviation strategy. Rather than waste P64 billion on unproductive cash doles, the extension of capital support for SMEs would have better contributed to inclusive growth.