Finance Monthly December 2019 Edition

Economic storm clouds are gathering The IMF’s downbeat forecast is reflected in individual national economic performances. Recession is an acute risk in Germany, stagnation grips Italy and question marks hang over France, given the size of President Macron’s financial stimulus – he has injected €25bn into the economy (the equivalent of 1% of GDP) since he took office. 2 While the CEE countries have performed better, concerns are growing there too. For instance, regional CEE leader Poland’s economic growth has been partly due to external factors, such as influx of inexpensive Ukrainian labour and benefiting from the cyclical upswing in the EU that peaked two years ago. SMEs are critical to Europe’s economic growth To help copewith the likelymore restrained growth picture going forward, the region’s 20 million SMEs are vital. According to the EU’s ESPON 3 , they account for around 99%of all businesses, they contribute 67% of total employment and generate nearly 60% of the value-added. The French SME sector alone, which has a productivity rate higher than the EU average, contributes 9 million jobs 4 while Germany contributes 18.3 million. 5 In Italy, they create nearly 67% of the value added to the country’s economy, according to data from the European Commission. 6 The pattern is similar in CEE - according to research by Polityka Insight, SMEs generate 36% of the national revenue 7 in Poland. But access to finance is still difficult Despite their key role in European economics, with regard to employment, productivity and overall output, SMEs across the EU are still finding access to finance challenging. A recent report by German platform-based lender creditshelf found that banks are more and more reluctant to lend to small businesses. Indeed, only half of German SMEs have access to such traditional finance. 8 Bank loans represent about 70% of corporate financing in France and Marie- Anne Barbat-Layani, 9 CEO of Fédération Bancaire Française, and other experts fear that credit supply to French SMEs will be constrained due to the growing regulatory pressure to monitor risk and solvency and the advent of Basel III. Italian banks’ overall loan supply has actually contracted, according to data from Euler Hermes, and the poor state of banks’ non-performing loans (NPLs) does not help their ability to boost lending. 10 There are similar difficulties in the CEE region, as their banking systems are less mature. In Poland, for example, there has been a significant reduction in corporate credit growth as well as in the rate of investment lending growth and the number of companies that have been tapping the commercial debt markets has declined too. 11 An array of alternative financing options have emerged To address this issue of accessibility to finance, a number of alternative sources of funding have emerged. Private credit is one of these alternatives, where non-bank lenders, such as pension funds and other investment institutions commit capital to private credit funds to lend to businesses. Indeed, the Alternative Credit Council, the industry’s global representative body, estimates that there could be over $1tn of assets under management internationally by 2020 12 . The sector has made inroads among European SMEs as this form of lending can be more bespoke and it offers more flexibility than bank finance and provides competitive lending terms. However, the private credit sector faces significant issues and the regulatory picture is not straightforward at all. In France, for instance, the regulatory requirements to set up as a private credit manager are prohibitively difficult 13 and in Germany, the German Banking Act has The private credit sector faces significant issues and the regulatory picture is not straightforward at all. “ “ 19 www.finance-monthly.com FINANCE & BUSINESS - ECONOMIC DOWNTURN IN EUROPE