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and access to finance European Investment Bank Luxembourg, 23 - - PowerPoint PPT Presentation
and access to finance European Investment Bank Luxembourg, 23 - - PowerPoint PPT Presentation
European financial landscape and access to finance European Investment Bank Luxembourg, 23 November 2017 Boris Vuji, Governor e-mail: boris.vujcic@hnb.hr Highlights What limits new investment opportunities? What can increase the
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What limits new investment opportunities?
Financing constraints – no longer a major obstacle to
corporate investment growth
Deleveraging pressures – abating, but legacies from past
excessive leverage and zombie lending still exist
Structural conditions – institutional and regulatory
frameworks and business environment become a growing concern
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Access to finance gradually improves ...
Percentage of SMEs responding that their most pressing problem is access to finance (SAFE) Financing sources gradually diversify – case of Croatia
Source: ECB, Bendel et al. (2017) Source: SAFE (CNB, 2017, 2015)
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... and deleveraging pressures have abated, but a firm-level look reveals remaining vulnerabilities
Corporate debt, as % of GDP Debt overhang in Croatia concentrated in large, non-exporting, foreign-owned firms, mostly in the construction sector
Source: Eurostat Source: Martinis and Ljubaj (2017), data obtained from FINA.
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Prevalence of zombies limits resource reallocation to and investment in non-zombies
The share of zombie firms was increasing and productivity gap widening Average across 8 OECD countries Potential gains from reducing the zombie capital share to the sample minimum, 2013
Source: Adalet McGowan, M., D. Andrews and V. Millot (2017), “The Walking Dead?: Zombie Firms and Productivity Performance in OECD Countries”, OECD Economics Department Working Papers, No. 1372, OECD Publishing, Paris. http://dx.doi.org/10.1787/180d80ad-en
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Corporate leverage is
- ne of the main
determinant of corporate resilience.
Leverage ratio varies
between member states.
Notes: Unconsolidated data, 2017Q1. Source: Eurostat
0.34 0.41 0.43 0.45 0.48 0.49 0.54 0.55 0.60 0.61 0.62 0.63 0.67 0.68 0.68 0.69 0.70 0.82 0.84 0.87 0.93 0.94 0.95 0.97 1.00 1.02 1.08 1.59 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 Denmark Sweden Lithuania Estonia Hungary France Spain Ireland Luxembourg Belgium Slovenia Poland Czech Republic Finland Germany Bulgaria Netherlands Romania Ireland Portugal Latvia United Kingdom Slovakia Austria Croatia Cyprus Greece Malta
Non-financial corporates debt-to-equity ratio
What can increase the financial resilience of corporates? (1)
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What can increase the financial resilience of corporates? (2)
Source: ECCBSO BACH database, FINA
Fixed assets mainly financed by the bank loans
a burden to financial statements
increases credit riskiness of companies
The higher trade receivables, the higher trade payables
Late collection or inability to collect receivables increases exposure to liquidity and credit risk of corporates
Each year across EU thousands of SME’s go bankrupt because of cash flow disruptions induced by late payments
5 10 15 20 25 5 10 15 20 25
Trade payables [% of total assets] Trade receivables [% of total assets]
Trade receivables vs. Trade payables @2015 AT BE DE ES FR HR IT PL PT CZ* SK*
* Due to data unavailability for 2015, CZ & SK as at 2014 and 2013 respectively 5 10 15 20 25 40 45 50 55 60 65 70 Amounts owed to credit institutions [% of total assets]
Fixed assets [% of total assets]
Fixed assets vs. Amounts owed to credit institutions @2015 AT BE DE ES FR HR IT PL PT CZ* SK*
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What can increase the financial resilience of corporates? (3)
Financial resilience of corporates can be increased by
implementation of active and mandatory risk management based on the role model implemented in financial sector
IFRS 9 is a step in right direction, but it’s effects and the scope of its
application is yet to be seen in the future
it might increase capital reserves/provisions and impairments for
financial instruments (mostly trade receivables) by recognizing potential losses, lowering corporate’s sensitivity to future volatilities of instruments values and returns
might discourage „shadow banking” as well
High share of fixed assets (particularly tangible) in total assets is
mainly financed by bank loans and is a burden to P&L and flexibility
- f business
further developments in real estate lease market would increase
flexibility and movability of business and consequently increase financial resilience of corporates
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What can increase the financial resilience of corporates? (4)
Trade credits play significant role in company’s financing (each of trade receivables and trade payables make between 10-20% of total assets in most of EU countries)
Reinforcing of financial discipline would increase short term liquidity and decrease days sales outstanding (DSO) and days payable outstanding (DPO), resulting in reduction of trade credit balance (TCB)
Large firms in many EU countries are more likely to find financing through the trade credit channel* using it as interest rate free „revolving-like” funding source
Source: ECCBSO, FSA WG * weighted means; analisys includes manufacturing, construction and trade
20 40 60 80 100 120
small medium large small medium large small medium large small medium large small medium large small medium large small medium large small medium large small medium large BE DE ES FR IT PL PT TR HR
DSO
2007 2010 2015
days
20 40 60 80 100 120 140
small medium large small medium large small medium large small medium large small medium large small medium large small medium large small medium large small medium large BE DE ES FR IT PL PT TR HR
DPO
2007 2010 2015
days
- 20
- 10
10 20 30
small medium large small medium large small medium large small medium large small medium large small medium large small medium large small medium large small medium large BE DE ES FR IT PL PT TR HR
TCB
2007 2010 2015
days
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What can incentivise firms to hold more equity?
Doing business 2018: Ease of enforcing contracts vs. Leverage in 2015
Increase of equity reduces financial leverage
Legal security increases usage of external financing
Still, other instruments could incentivise companies to hold more equity:
retaining profits could be encouraged by taxation policy (retained profit converted to equity is
non-taxable, like in i.e. HR)
Source: ECCBSO BACH database, FINA, WB Doing business EU 2018 150 170 190 210 230 250 270 290 310 330 50.00 55.00 60.00 65.00 70.00 75.00 80.00
Assets to Equity ratio [%] DB_Score (Ease of enforcing contracts)
Doing business 2018 & Assets to Equity ratio AT BE DE ES FR HR IT PL PT CZ SK
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More equity financing availability needed to support development of innovative firms
Note: Group ranking weighted by countries’ GDPs. Source: Global Competitiveness Report 2016–2017
Financing through local equity market, 2016 Venture capital availability, 2016
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Debt versus equity capital flows
Foreign capital inflows - potential positive effects as well as negative
consequences
Macroeconomic effects of capital flows depend on their structure
(FDIs that are relatively more oriented towards tradable sector, lead to productivity enhancements and are less volatile, while real exchange rate appreciation is mainly due to debt inflows), with risks for financial stability stemming more from debt flows (particularly from those financing household debt boom)
FDI inflows to CEE region are below pre-crisis levels, even looking at
a longer period average, implying lower potential positive spillover effects
Scarce capital flows emphasize the importance of efficient resource
allocation, especially capital allocation, towards the more productive firms
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