According to the Ministry of Production, 99.8% of Argentina’s companies are micro-, small and medium-sized enterprises (MSMEs) – those with fewer than 200 employees – in 2017. With a 4.1m-strong workforce, they also provided the majority of jobs. A skilled local labour force and pervasive entrepreneurial spirit have also fostered a dense and diverse MSME ecosystem, covering nearly all sectors.
The previous administration’s prioritisation of local production and employment fostered a relatively robust MSME segment through to 2015. However, after the election of President Mauricio Macri in November that year, the country has repealed years of protectionist safeguards and reopened its borders. This led to the arrival of cheaper imports, which weighed on MSMEs. Nevertheless, President Macri has emphasised that his administration will seek to support the development of MSMEs and enable the segment to capitalise on a more open market.
MSME Structure
As of 2016 – the most recent year for which figures were available – nearly 606,000 of the 856,000 domestically registered businesses were job providers. Of these so-called active companies, 83% were considered micro-sized, 16.8% small or medium-sized and 0.2% large. In terms of sector, the largest cohort (37%) of enterprises operated in a services-oriented industry, followed by 30% in wholesale and retail trade, 10% in farming and livestock, and 10% in manufacturing.
Companies were heavily concentrated by region in early 2017: 69.9% were located in four of a total 24 regions – comprising 23 provinces and the Federal Capital District – with the Federal Capital District and greater Buenos Aires home to more than 50% of all enterprises. While 80.6% of the 5990 exporting companies were MSMEs at that time, they only accounted for 17.8% of total exports.
Between 2007 and 2011 the number of active companies climbed by 8%. However, these numbers began to stagnate over 2011-14, before decreasing between 2015 and 2016. This downward trend has since continued, with number of companies opening in the first quarter of 2018 decreasing by 4.5% year-on-year. These trends are due to challenges in acquiring financing, as well as changes in aggregated market demand and the regulatory framework.
Performance
July 2017 marked the first month of industrial MSME production growth after 21 months of decline, according to a survey by the Argentine Confederation of Medium-sized Enterprises ( Confederación Argentina de la Mediana Empresa, CAME) across 250 MSMEs. By the end of that year only marginal growth of 0.3% was recorded on 2016, which was one of the worst years on record, with a 5% drop in production from 2015. In the first half of 2018 industrial MSME production grew by an average of 1.1% year-on-year, with stronger growth in the first quarter of the year. Fabian Tarrio, president of CAME, noted that high fixed costs, lacklustre sales, increasing cost of financing and payment delays were negatively affecting the profitability of MSMEs.
Access to Finance
According to local consulting firm First Capital Group, while the potential credit demand from MSMEs amounted to $100bn in 2017, their actual credit portfolio was equivalent to 3% of GDP, translating to a $72bn shortage. According to a 2010 survey by the World Bank, a comparatively small portion of funding for small enterprises and medium-sized businesses took the form of bank loans, with 11% and 14.5%, respectively. Meanwhile, in Brazil and Chile bank loans represented 32.2% and 50.6% of investments in these segments, respectively.
Moreover, 43.5% of companies identify access or cost of credit in Argentina as restrictive – significantly higher than the Latin American average of less than 30%. A separate study by Fundación Observatorio PyME in June 2017 concluded that industrial MSMEs needed $1.4bn of investment, with those most in need operating in food and beverages (26%). Bank participation in investment for MSMEs dropped from 35% in 2015 to 22% in 2016, while the share of MSMEs financing their own development projects increased from 54% to 68% over this period. Capital markets are similarly underutilised, comprising less than 1% of total investment in MSMEs.
Underutilised Credit
Fundación Observatorio PyME also found that the proportion of companies requesting credit from the financial sector never exceeded 40% over the 2006-16 period. In 2016, 37% of companies that applied for a loan did so for short-term funds, or working capital, while 12% sought leases and 33% some other type of credit. Out of $1.3bn worth of demanded loans, the financial sector has supplied $1.15bn, with over 50% of this coming from national banks. Of firms that did not apply for credit, 37% did not consider this financial assistance necessary, 27% said that interest rates were prohibitive and 12% reported that they were not able to meet banks’ criteria for selection.
In 2012 the government introduced the Financing Line for Production and Financial Inclusion, which required that banks to lend part of their portfolio at lower-than-market rates to MSMEs. Since the implementation of this policy, loans to MSMEs have substantially increased, reaching 45% of total credit to the private sector in local currency. Since early 2018 the central bank has made efforts to gradually lift this requirement, which is likely to cause higher financing costs for smaller businesses.
However, public and private banks, including Banco Nación, Banco Provincia and Banco Galicia, have launched new lines of credit at lower interests and with longer maturities to facilitate financing in the industrial sector since 2016, with a particular focus on MSMEs. The government also launched a $1.5bn subsidised loan programme for MSMEs through the Bank for Investment and Foreign Trade, allowing it to issue credit at 16% interest with maturities of up to seven years and a two-year grace period. The subsidy scheme has now been discounted, however.
MSMEs primarily use their own resources to meet their funding needs, followed by bank loans, and to a much lesser extent other methods, such as factoring through capital markets, trading in deferred-payment cheques or negotiable debt securities.
Reforms
In response to this underutilisation of funding sources, the government of President Macri has been implementing policies that aim to better understand and support MSME development. It established updated parameters through which a company may be characterised as an MSME depending on the sector and annual sales figures. The passage of the MSME Law in July 2016 also provided smaller firms with exemptions from the minimum presumed income tax, an extension of the deadline for value-added tax payments, fewer bureaucratic procedures and easier access to financing.
Other draft legislation is being discussed, including a bill to extend the advantages benefitting local companies in public-tender processes. Furthermore, a national plan is under consideration to differentiate tariffs for MSMEs and cooperatives. If passed, the segment would benefit from discounts on tariffs for basic services such as utilities.
Passed in early 2017, the Entrepreneurship Law also serves to facilitate the registration, promotion and development of enterprises through the establishment of joint-stock companies, enabling the digital creation of new businesses in less than 24 hours. Moreover, the law established the Registry of Institution for Entrepreneurship Capital (Instituciones de Capital Emprendedor, ICE) – which provides incentives to companies investing in entrepreneurship programmes – and the Fiduciary Fund for the Development of Entrepreneurship Capital to finance entrepreneurs and third-party institutions qualifying for benefits from the ICE. Reforms for capital markets – such as the introduction of obligaciones negociables simples garantizadas (simple negotiable debt securities) – have already begun to affect the ability of MSMEs to acquire financing through the stock exchange, and ongoing reforms are anticipated to continue the trend.
The challenges facing MSMEs have played an important role in the public agenda since the election of President Macri, with reforms including specialised treatment for smaller firms. The authorities have sought to reduce the role of the public sector in the economy and provide the means for the private sector to take over many of these responsibilities. The success of such efforts will require the development of a strong, dynamic MSME segment. In this context, the MSME Law marked a first step towards strengthening the competitiveness of local enterprises; however, the formalisation of the large informal sector will require substantial efforts in building trust and providing an adequate environment for MSMEs to grow without pressure from authorities.
