StanChart cautions SMEs on Europe deals amid euro crisis

MANILA, Philippines - Small and medium enterprises (SMEs) must have sufficient liquidity, including access to debt, to ensure business continuity in their operations, according to Standard Chartered Bank (StanChart).

StanChart global head for SME Banking Tim Hinton said that in an increasingly interconnected world, SMEs are not immune to problems elsewhere, such as the euro crisis.

“Even for SMEs not directly exposed to European trade flows and/or currencies, there could be bottom line implications. The uncertain outcome of the crisis could lead to increased volatility in foreign exchange (FX) and commodity prices, both of which could impact SMEs involved in trade and manufacturing,” Hinton said in a report.

The bank executive explained that SMEs are often an integral part of the supply chain of multinational companies (MNCs).

For larger medium-sized enterprises, they may supply to or buy direct from the MNCs and for smaller businesses. They may also deal direct or through other companies, including other SMEs. If a MNC is headquartered or based in Europe, then all SMEs in its supply chain are likely to feel the impact of the debt crisis.

But the sad reality is that Asian-based SMEs are in an inferior position to absorb these downstream macro effects and this consequently has a number of dangerous implications, Hinton noted.

The StanChart executive said some of these implications include reduced credit appetite from banks due to their European exposure, and increased working capital requirements relative to the proportion of the impact they in turn can pass on to their customers.

Another dangerous situation is reduced bank and country risk limits and/or increased pricing on solutions or products incorporating these as risk mitigants, and that the increased currency volatility that they may not be resourced for or experienced enough to deal with.

SMEs may also be forced to embrace new or additional currency hedging cost, as well as increased credit insurance costs on counterparties not considered as a default risk prior to the new crisis.

Hinton also warned of the possibility of price increases for SME buyers or price reductions for SME suppliers to MNCs, and the need to consider diversifying their reliance on a particular MNC or country.

“Asian SMEs should assess their FX, interest rate and commodity exposures and review the different options available in mitigating these risks. These can be in the form of FX forwards, interest rate/currency swaps, vanilla options or commodity hedging solutions,” he added.

With the help of treasury specialists, SMEs can mitigate some of these uncertainties in their operating costs. SMEs should also analyze their ongoing business exposures to clients, in particular, those that are in or are dealing with Europe, he said.

The StanChart executive said that credit risk on receivable counterparties can be mitigated by taking appropriate insurance and working capital lines to support any lengthening of payment terms should be secured now rather than when the company has a cash crunch. Businesses often fail due to cash shortages and not because they are not profitable.

“There are different opinions on the ultimate outcome to the euro crisis and the extent to which it may affect businesses in Asia. However, there is no doubt that SMEs should be prepared and plan ahead, taking measured actions to ensure their continued survival,” Hinton added.