THIRD TRI NATIONS SUMMIT ON SMALL BUSINESS

Session II: Critical role of finance in building competitive MSMEs

leading the way

Title: BRIDGING FINANCIAL GAPS FOR MSME

PRESENTATION PLAN

• BRAZILIAN ECONOMIC MODEL UNDER BRAZILIAN ECONOMIC MODEL UNDER

THE NEW UNCERTAINTY SCENARIOTHE NEW UNCERTAINTY SCENARIO

• FINANCING SME IN THE BRAZILIAN FINANCING SME IN THE BRAZILIAN CONTEXTCONTEXT

• SEBRAE´S LEADING STRATEGY FOR SEBRAE´S LEADING STRATEGY FOR SUPPORTING MSE FINANCING:SUPPORTING MSE FINANCING:

REDUCING THE GAPSREDUCING THE GAPS

THE BRAZILIAN ECONOMIC MODEL

1. INFLATION TARGET

2. FISCAL RESPONSIBILITY

3. FLOATING EXCHANGE RATES

INFLATION (CPI)

%

0

3

6

9

12

15

18

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

17,24%

consenso2008: 4,5%

Fonte: IBGE, Bacen

12 months

Meta4,5%

PUBLIC SETOR DEBT/GDP

Fonte: BCB

% P

IB

38

42

46

50

54

58

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jul40,6%

US

$ b

ilh

ões

FOREIGN EXCHANGE RESERVES

Fonte: BCB

0

55

110

165

220

Jan03

Jan04

Jan05

Jan06

Jan07

Set08

abr15,9

23 Set206,1

Fonte: BCB

EXTERNAL VULNERABILITY

-5

0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004 2005 2006 2007Ago2008

1

3

5

7

9

11

%

DEBT SERVICES/GDP

DEBT/GDP

%

%

BRAZIL GDP GROWTH RATE

Fonte: IBGE

-1

0

1

2

3

4

5

6

1T99

1T00

1T01

1T02

1T03

1T04

1T05

1T06

1T07

2T08

6,0%

AVG 99-031,9%

AVG 04-084,8%

COMPARING REGIONS...

Fonte: FMI

0

1

2

3

4

5

6

EUA Área Euro Japão Mundo

20062007Estimated 2008 (oct/07)estimated 2008 (atual)estimated 2009 (atual)

%

2,9

0,8

2,8

1,2

5,1

3,9

0

20

40

60

80

100

120

140

Argen

tina

Méx

ico

Brasi

l

Coréia

Filipin

asChile

Tailâ

ndia

Mal

ásia

% d

o P

IB

Source: IMF

37

CREDIT AS % OF THE GDP

THE FAVORABLE IMPACTS FOR MSME ...

1.ECONOMIC STABILITY

2.CREDIT EXPANSION

3.INEQUALITY REDUCTION

Summarizing

THE NEW SCENARIO

AND THE SME CONTEXT

BACKGROUND...

1. THE FINANCIAL CRISIS IS BASED ON THE LONG

PERIOD OF LOW INTEREST RATES IN THE U.S

2. SUBSTANCIAL INCREASE IN CREDIT AND REAL

ASSETS PRICES (SPECIALLY REAL STATE)

3. CREDIT EXPANSION WAS FOLLOWED BY

FINANCIAL INNOVATION THAT ALLOWED

LEVERAGE, WITHOUT PROPER SUPERVISION.

IMPACTS OVER THE BRAZILIAN ECONOMY

1. IN THE LAST FEW YEARS, BRASIL TOOK

ADVANTAGE OF THE FAVORABLE

SCENARIO TO INCREASE ITS CAPACITY

TO EXTERNAL SHOCKS.

2. ELIMINATION OF PUBLIC SECTOR

FOREIGN EXCHANGE INDEBTENESS HAS

INTERRUPTED AN OLD VICIOUS CICLE OF

EXTERNAL IMPACT CONTAMINATION

1. TO CONTINUE FOSTERING SUSTAINABLE ECONOMIC GROWTH

2. TO IMPLEMENT COUNTERCICLE CREDIT POLICIES UNDER BANKING RISK AVERSION

3. TO LOWER INTEREST RATES UNDER CURRENCY APPRECIATION AND INFLATIONARY THREATEN

4. TO DEEPEN ECONOMIC AND POLITICAL REFORMS

5. TO SUSTAIN SOCIAL WELFARE EXPENDITURE FOR LOWER GOVERNMENT REVENUES SCENARIO

CHALLENGES FOR THE MODEL UNDER UNCERTAINTY

WHY CREDIT IS SO HARD FOR MSME IN DEVELOPING

COUNTRIES?

1. USUALLY FINANCIAL SECTOR IS THE MOST REGULATED SECTOR

2. LOWER DEVELOPMENT STAGE MEANS HIGHER ASSIMETRY AND LACK OF INFORMATION.

3. FINANCIAL ACTIVITY STILL HIGHLY BASED ON GUARANTEES INSTEAD OF BUSINESS VIABILITY.

4. HIGH INCOME INEQUALITIES

5. LACK OF POLITICAL PRIORITY

IT GETS WORST FOR MSME….

•FINANCIAL TRANSACTIONS HIGH FIXED COSTS FOR

•LACK OF GUARANTEES AND DIFFICULTIES FOR RECOVERING

•NON RELIABLE ACCOUNTING DATA

•THE BUSINESS AND THE BUSINESSMAN ARE THE SAME.

FINANCIAL MARKET AND THEIR TARGETS

LEGAL ADVANCES

• ALTERNATIVE DISTRIBUTION CANALS:–BANKING CORRESPONDENTS–CREDIT UNIONS

• ALTERNATIVE FINANCIAL PRODUCTS AND SERVICES TO BUSINESS SEGMENTS PREVIOUSLY NOT ATTENDED.

SEBRAE´S STRATEGY FOR SUPPORTING MSE FINANCING

SEBRAE IS NOT A FINANCIAL INSTITUTION !!!!

OUR MISSION IS:

TO INDUCE PROXIMITY BETWEEN FINANCIAL SYSTEM AND SMALL BUSINESS TOWARDS HIGHER CREDIT ACCESSMENT AND LOWER

FINANCIAL SERVICES COSTS

Micro and Small Business

National Financial System

COSTS ACCESS

INFORMALSSMALL BUSINESS

INFORMATIONINFORMATION

NEGOTIATION GUARANTEES MICROFINANCE

HOW TO REDUCE INFORMATIONAL COSTS AND CREDIT RISKS?

From the individual analysis and to business groups

COLLECTIVEINDIVIDUAL FIRMS

What are the advantagens of such strategy for the MSE point of view?

Collective demands and commitement

Customized products and

services Better access conditions

Closer relation with the financial

institution

Learning process

Lower costs and risks

Scale

Assimetry of information

reduction

What are the advantages of such strategy for the Financial Institution point of view?

PROGRAMS AND PROJECTS

• MICROFINANCE– MICROCREDIT SUPPORT PROGRAM– CREDIT UNIONS SUPPORT PROGRAM

• SPECIAL FUNDS AND PROJECTS– CREDIT GUARANTEE PROGRAM– VENTURE CAPITAL INVESTOR

• INFORMATION AND CLIENT ORIENTATION

FINAL CONSIDERATIONS...

WHY FINANCING IS SO CRITICAL FOR BUILDING MSMEs COMPETITIVENESS ?

• TO FOSTER INVESTMENT AND ECONOMIC GROWTH, REDUCING INEQUALITIES

• TO STRENGHT CONSUMPTION AND LARGE COMPANIES CHAIN VALUES.

• TO DEVELOP LOCAL AND SECTORIAL MSME ARRANGEMENTS

• TO INDUCE INNOVATION

• TO PURSUE ECONOMIC STABILITY AMONG THE BRAZILIAN FAMILIES PROMOTING SOCIAL PEACE.

1. CREDIT IS NOT A PANACEA

2. TECHNICAL SUPPORT IS DECISIVE FOR MSME

3. CONSISTENT PUBLIC POLICIES

4. PRIVATE AND 3RD SECTOR ARE ALSO IMPORTANT PLAYERS IN FINANCING MSME.

Some remarks...

WWW.UASF.SEBRAE.COM.BR

ALEXANDRE GUERRA DE ARAUJO

alexandre@sebrae.com.br