Hungarian economy can grow faster if the SME sector emerges well from the crisis

English2021. márc. 22.Péter Harsányi

Economy protection measures strengthen the position of the SME sector and support their investment activity. This is essential for the subsequent increase in the productivity of the sector, which forms the backbone of the Hungarian economy. If the central bank's competitiveness proposals are implemented, Hungary may catch up with the more developed western states significantly faster.

99 percent of the businesses operating in Hungary are small and medium-sized enterprises. They provide employment for two-thirds of employees in the business sector, and they are responsible for more than 40 percent of the revenue of all enterprises; therefore we are talking about a very significant segment. 

In addition, nearly 80 percent of SMEs operate in the service sector, in which the epidemic has caused more serious damage than in the manufacturing industry. 

For this reason, the economic policy gives prominence to supporting the SME sector. Following the stabilization of small and medium-sized enterprises exposed to the coronavirus, the efficiency of SMEs may continue to increase.

So that Hungary can close in economically in the long run, the productivity of the SME sector must be increased by at least 7 percent annually.

This strategic goal has already been formulated in the 330-point competitiveness program of the Hungarian National Bank (MNB). The efficiency and productivity of domestic SMEs is moderate, and they are also lagging behind large companies in terms of digital solutions. What is reassuring, though, is that in 2014 and 2015 we already saw the productivity of SMEs growing by 7 percent a year.

Size efficiency and wage share

In 2018, there were 750,000 micro, small and medium-sized enterprises in Hungary, 710,000 of which were micro-enterprises with less than 10 employees. The number of small enterprises was 35,000, while the number of medium-sized businesses was around 5,000; so the domestic SME segment was rather fragmented.

According to a study by MNB, small enterprises are 80 percent, while medium-sized enterprises are 240 percent more productive than micro enterprises. Therefore, the creation and merger of small and medium-sized enterprises should be promoted in the long run.

When the epidemic ends and wage growth continues, labour shortages may arise again. This is a problem for less efficient businesses, because their wage share has exceeded their long-term average, and thus, a smaller company can spend a significant part of its sales revenue on wages, which also leads to serious difficulties in the long run. The solution to this is to increase productivity, apply digital solutions, create larger companies, and open up to export, which can increase the sales revenue of these companies.

How does the economic policy help investment?

Investments are essential if we want to increase productivity. The domestic SME sector has already received 1,700 billion forints in soft loans from the 2,500 billion Funding for Growth Scheme ‘Hajrá’.

Half of this amount has been taken out as working capital loans to support day-to-day operations, while investment loans have amounted to 500 billion forints. With the epidemic coming to an end, the focus may gradually shift toward investment loans. 

In addition to the Funding for Growth Scheme ‘Hajrá’, we must mention the loan moratorium, in which almost half of the corporate borrowers participate. The interest-free quick restart loan with a budget of 100 billion forints will also be of great help to companies facing difficulties. Although these two programs do not directly support investment projects, they indirectly support them by helping businesses get through the crisis, and so they will be able to allocate more money for investment.

Furthermore, MNB keeps interest rates low, so businesses can take out loans at very favourable interest rates.

In the case of enterprises, there is still plenty of room for a healthy expansion of the loan portfolio, as the corporate loan-to-GDP ratio is only around 18 percent in Hungary, whereas the eurozone average is about twice as much. 

In addition, the Hungarian Development Bank (MFB) is helping the restart of the economy with a coordinated loan, capital and guarantee program worth nearly 1,500 billion forints.

Competitiveness Program

In its 330-point competitiveness program, MNB has made several proposals to incentivize investments by SMEs.

Immediate accountability of investments in the tax base would provide a significant incentive for investment.

In order to achieve this, investment depreciation rates would have to be raised so that assets could be written off more quickly. Currently, IT assets can be depreciated at a rate of 33 percent in 3 years, motor vehicles at a rate of 20 percent in 5 years, a building at a rate of 2 percent in 50 years, and everything else at a rate of 14.5 percent in 7 years.

Deductibility of investments from the local business tax would also be a noticeable relief.

The rate of the local business tax varies from settlement to settlement, but in Budapest and in most other settlements it is 2 percent. As part of the economy protection measures, the maximum rate of the local business tax for small and medium-sized enterprises has been cut by half by the government this year, i.e. it cannot be higher than 1 percent. As a result of this, 150 billion forints may be left with smaller companies in 2021. 

Linking wage rise subsidies for SMEs to investment could also support small and medium-sized enterprises that have difficulty in managing the cost of higher minimum wages, but at the same time want to develop. 

Another proposal of the central bank is the targeted reduction of the social contribution tax in the SME sector. Here, however, it is also worth mentioning that the state has reduced the social contribution tax from 22 percent to 15.5 percent in several steps since 2017. This has already been a significant financial relief, leaving more money for wages and investments.

Digitalization

Consumer habits began to change during the pandemic; the online sales turnover has grown by 30-40 percent in recent months.

In many cases, however, Hungarian SMEs do not use even basic digital solutions. 

In the changed environment, user-friendly company websites, e-commerce, online shopping methods, flexible payment and home delivery options, online marketing and search engine optimization will all become even more important. In addition to these, the use of process models and organizational optimization can also increase efficiency. 

The lack of leading digital technologies (ERP, CRP, cloud services) in the domestic SME segment is also a problem.

Rate of medium-sized companies using advanced technologies (2015)

Webpage; ERP software; CRM software; Social media; Computer and internet; ICT risk management; Online orders/booking; Cloud services; Internet orders; >100 Mbit/s network speed
Source: MNB

Enterprise Resource Planning systems (ERP) integrate all information related to the external environment and internal operation of a company; they support the work of employees and at the same time significantly increase the efficiency of the given enterprise. 

Customer Relationship Management (CRM) manages the company’s relationships and interactions with existing and potential customers, among other things, and stores important information, therefore it is also a useful tool.

Summary

To sum up, as the epidemic subsides, there will be an increasing demand for investments that improve efficiency and digitalization in the new environment. If, in addition to the economy protection measures, the central bank's competitiveness proposals are implemented and the investment and growth of SMEs increases substantially, then Hungary may catch up with the more developed EU countries considerably faster.