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[Top News] from [REUTERS]

[Small Business]
East Europe's SMEs seen key to economic recovery
Fri Oct 16, 2009 10:27am EDT
By Marton Dunai - Analysis

BUDAPEST (Reuters) - Imploding demand and tighter credit have held back eastern Europe's small and medium firms in the economic crisis, and how they cope could significantly determine which countries in the region recover quicker.

Hungarian, Czech and Polish small and medium enterprises (SME's) account for 60 to 70 percent of employment, and about half of the output and taxes in their economies. That makes them crucial for the region's post-crisis growth prospects.

In Poland, whose 38 million people number just under the Czech, Hungarian and Romanian populations combined, small businesses will grow already in the second half of this year.

Export-driven Czech and Hungarian SME's have less of a domestic market and will return to growth later, analysts said.

Factors like fiscal discipline, a pickup of demand in western Europe and the flow of foreign direct investments will also determine the pace of recovery in the region.

How SME's fare could, however, set eastern European countries apart once the economic recovery gathers speed.

"On the long run we need to realize that multinational exporters are helpful but not enough for catching up," said Zsolt Kondrat, an economist at Hungary's MKB Bank.

"There is no recovery without small business."

Kondrat said Poland had a much bigger domestic market and better opportunity there for SME's while the Czechs were in the middle, with a solid tax system and interest rate regime.

"Hungarian SME's suffer from a smaller market, a dependence on large multinationals, as well as counterproductive taxes and higher interest rates, which hinder growth," he said.

Peter Latranyi's HTCM Ltd. manufactures and repairs tools in Szentgotthard, in western Hungary. His biggest client is Opel, the troubled German car company, which makes engines nearby. When Opel scaled back recently, so did HTCM.

"We had to let 12 of our 60 people go," Latranyi said. "We hope to get out of the slump once our clients get new orders, but we can't go on like this forever."

Latranyi said if business does not pick up in a few months, they will have to pack it in.

LENDING SQUEEZE

Scores of Hungarian and Czech business owners are being forced to lay off staff and delay investments. Many of them could go bust soon, victims of weak markets, scarce credit and melting cash reserves, business groups and bankers have said.

The economic effects of bankruptcies and slow recovery are far reaching, from higher unemployment and lower growth to lower consumption and tax revenues, and a higher budget deficit.

While Poland will grow, the Czech and Hungarian economies are expected to shrink by about 0.5 percent and 0.9 percent, respectively, next year and seen growing only from 2011.

Although banks are adequately capitalized, patterns in lending show they see SME's as risky, and fear loan losses.

According to a report issued in August by the National Bank of Hungary, banks expect a tight lending market ahead as SME's drain inventories, spend cash reserves, struggle to collect receivables, and cut back on investments.

Banks have practically stopped signing up new loan clients.

"Lending to SME's is very limited," said Peter Vidlicka, regional banking analyst with Wood & Co. in Prague. "Banks are afraid bankruptcies will spread if the downturn continues."

"Corporate lending, and especially working capital flows, have been declining in Poland, the Czech Republic and Hungary alike. Banks are repricing corporate lending upwards, and companies are not going to banks as much as they used to."

HARDSHIPS AHEAD, BUT SOME SUCCEED

Hungary's financial watchdog PSZAF said in a report that the total outstanding stock of SME loans decreased by 12 percent, or 478 billion forints ($2.64 billion) in the second quarter alone.

In total volume terms, short-term loans outweigh longer term ones nearly 5 to 1 this year, as opposed to 2 to 1 seen in 2008, as firms scale back on strategic investments.

"The most difficult period for SME's is up next," said Ferenc Rolek, deputy chairman of Hungary's Confederation of Employers and Industrialists, or MGYOSZ. "The next two quarters will be crucial for their survival."

Rolek said government loan guarantees could help them secure much-needed bridge loans - something that the Hungarian Banking Association has also called for.

"Up to 80 percent of all SME loans are vulnerable," said Tamas Erdei, the association's chairman. "Banks cannot, dare not undertake the risk alone."

Hardship or not, some firms fare very well. Lipoti Bakeries Ltd. has grown from a mom-and-pop bread shop in western Hungary into a crossborder chain of 100-plus outlets in three years.

Owner Peter Toth recently bought a rival company and now employs 300 people. He expects 250 million forints ($1.39 million) in profit this year on revenues of 2.5 billion. In his latest move, he began to ship to Slovakia.

"We have had to take on multinational grocery chains from day one," he said. "Tough times didn't start with the crisis."

(Reporting by Marton Dunai)


[Small Business]
Palestinian soapmakers eye new market
Fri Oct 16, 2009 3:41pm EDT
By Alastair Macdonald

NABLUS, West Bank (Reuters) - Walking on water may be a familiar tale from the Holy Land, but in the heart of ancient Nablus, Majoud Malawani walks on soap. Roomfuls of it.

The white slabs an inch thick are made from pure olive oil, drying slowly under the airy, bleached vaults of a large, scented workshop that seems to have set in another age.

Skipping over hardened floes of soap that have been poured and dammed into place across the factory floor, Malawani wields a long-handled cutter with a dexterity that belies his 75 years and a cataract-clouded eye, slicing the creamy product into bars along lines measured with string and marked up using red dye.

Now that the Palestinian Intifada, or uprising, has receded and the Israeli army is easing roadblocks around Nablus, long the industrial hub of the West Bank, those of the city's once ubiquitous soapmakers who have survived a sharp decline in sales are eyeing new markets abroad for their all-natural product.

Under the arches and buttresses on the ground floor of the Ottoman-era building, beneath the drying loft, Malawani, who like many of his half-dozen colleagues has worked there most of his life, showed off the barrels of olive oil and white bags of soda that, with water, are the only ingredients of Nablus soap.

Among the few concessions to modernity are an electric arm to stir the bubbling open cauldron. There the soap mix "cooks" like a thick pumpkin soup for five days over a gas burner which has replaced the olive-wood fires that once powered the process.

"We are proud to use this because it is pure," said the foreman, Mohammed Fatayer, 71, who has followed in his family's soapmaking tradition since he was 13. Unlike the animal fats and chemicals typical of modern, mass-market hygiene, he said, it was simple and clear what went into the soap from Nablus.

The consumer trend toward that organic simplicity gave him hope that this factory, run mostly by old men, did have a future: "Demand is growing for pure products," Fatayer said.

Once manhandled up the stairs, the liquid mixture dries on the floor before being cut into blocks and stamped with a brass hammer bearing the cross-keys mark of the Touqan family firm.

These are then stacked in tapering, hollow towers, higher than the heads of the workmen, to harden for a further three months. That's where Izzedeen al-Johari comes in.

Chatting easily as he squats on the floor under the cones of drying soap, the 60-year-old's hands fly over paper and glue to wrap each bar individually and neatly in just a few seconds.

Working on a piece rate, he reckons to wrap 600 bars an hour or nearly 5,000 in an eight-hour day. These are then packed into 10 kg (22 lb) cases that sell wholesale for about $30.

Touqan's manager, Nael al-Qubbaj, said the firm is now only one of two commercial soapmakers in Nablus, compared to 17 in the 1990s, before the Intifada brought Israeli tanks, curfews and streetfighting into a town the locals call "Little Damascus" because of the traditional stone alleys of its central souk.

Even before then, the old industry had been in decline -- there were more than 50 soap factories in the 1960s, Qubbaj said. But occupation and violence had taken a toll, pushing down output at the Touqan works to 300 tons a year from 680 tons annually before the Intifada broke out in 2000.

Most of the oil still comes from Palestinian olives, though seasonal supply difficulties mean imported Italian oil is used at times. Some two thirds of the output goes to Jordan and thence further afield in the Middle East. But Qubbaj has spotted a potential market among eco-conscious shoppers in the West.

"I am studying investment. We could increase our capacity," he said this week. "Natural products are very popular with Europeans. I hope that we can open a small market there."

Back on the factory floor, where the workers take Turkish coffee at low stools, bathed in a milky light filtering through the drying stacks of soap, Mohammed Fatayer has heard the message: "Yes," he said, "We hear foreigners are interested."

(Additional reporting by Atef Saad, editing by Paul Casciato)

(For blogs and links on Israeli politics and other Israeli and Palestinian news, go to blogs.reuters.com/axismundi)