European financial landscape and access to finance European Investment Bank Luxembourg, 23 November 2017 Boris Vujčić, Governor e-mail: boris.vujcic@hnb.hr
Highlights What limits new investment opportunities? What can increase the financial resilience of corporates? What can incentivise firms to hold more equity? Debt versus equity capital flows
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
Access to finance gradually improves ... Percentage of SMEs responding that their Financing sources gradually diversify – case of Croatia most pressing problem is access to finance (SAFE) Source: ECB, Bendel et al. (2017) Source: SAFE (CNB, 2017, 2015)
... and deleveraging pressures have abated, but a firm-level look reveals remaining vulnerabilities Debt overhang in Croatia concentrated in Corporate debt, as % of GDP large, non-exporting, foreign-owned firms, mostly in the construction sector Source: Eurostat Source: Martinis and Ljubaj (2017), data obtained from FINA.
Prevalence of zombies limits resource reallocation to and investment in non-zombies The share of zombie firms was Potential gains from reducing the zombie increasing and productivity gap capital share to the sample minimum, 2013 widening Average across 8 OECD countries 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
What can increase the financial resilience of corporates? (1) Non-financial corporates debt-to-equity ratio Malta 1.59 Greece 1.08 Cyprus 1.02 Croatia 1.00 Austria 0.97 Corporate leverage is Slovakia 0.95 United Kingdom 0.94 one of the main Latvia 0.93 Portugal 0.87 determinant of Ireland 0.84 corporate resilience. Romania 0.82 Netherlands 0.70 Bulgaria 0.69 Germany 0.68 Finland 0.68 Leverage ratio varies Czech Republic 0.67 Poland 0.63 between member Slovenia 0.62 Belgium 0.61 states. Luxembourg 0.60 Ireland 0.55 Spain 0.54 France 0.49 Hungary 0.48 Estonia 0.45 Lithuania 0.43 Sweden 0.41 Denmark 0.34 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 Notes: Unconsolidated data, 2017Q1. Source: Eurostat
What can increase the financial resilience of corporates? (2) Fixed assets vs. Amounts owed to credit institutions Trade receivables vs. Trade payables @2015 @2015 Amounts owed to credit institutions [% of total 25 25 Trade payables [% of total assets] 20 20 15 15 assets] 10 10 5 5 0 0 40 45 50 55 60 65 70 0 5 10 15 20 25 Fixed assets [% of total assets] Trade receivables [% of total assets] AT BE DE ES FR HR IT PL PT CZ* SK* AT BE DE ES FR HR IT PL PT CZ* SK* The higher trade receivables, the higher trade Fixed assets mainly financed by the bank payables loans Late collection or inability to collect receivables a burden to financial statements increases exposure to liquidity and credit risk of increases credit riskiness of companies corporates Each year across EU thousands of SME’s go bankrupt because of cash flow disruptions induced * Due to data unavailability for 2015, CZ & SK as at 2014 and 2013 respectively by late payments Source: ECCBSO BACH database, FINA
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 of business further developments in real estate lease market would increase flexibility and movability of business and consequently increase financial resilience of corporates
What can increase the financial resilience of corporates? (4) days Trade credits play significant role in company’s financing DSO 2007 2010 2015 120 (each of trade receivables and trade payables make 100 between 10-20% of total assets in most of EU countries) 80 Reinforcing of financial discipline would increase short 60 term liquidity and decrease days sales outstanding 40 (DSO) and days payable outstanding (DPO), resulting in reduction of trade credit balance (TCB) 20 Large firms in many EU countries are more likely to find 0 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 financing through the trade credit channel* using it as interest rate free „revolving - like” funding source days 2007 2010 2015 TCB BE DE ES FR IT PL PT TR HR 30 days DPO 2007 2010 2015 140 20 120 10 100 80 0 60 -10 40 20 -20 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 0 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 BE DE ES FR IT PL PT TR HR Source: ECCBSO, FSA WG * weighted means; analisys includes manufacturing, construction and trade
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) Doing business 2018 & Assets to Equity ratio 330 310 Assets to Equity ratio [%] 290 270 250 230 210 190 170 150 50.00 55.00 60.00 65.00 70.00 75.00 80.00 DB_Score (Ease of enforcing contracts) AT BE DE ES FR HR IT PL PT CZ SK Source: ECCBSO BACH database, FINA, WB Doing business EU 2018
More equity financing availability needed to support development of innovative firms Financing through local equity market, 2016 Venture capital availability, 2016 Note: Group ranking weighted by countries ’ GDPs. Source: Global Competitiveness Report 2016 – 2017
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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