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 UNDERBRAZILIAN ECONOMIC MODEL UNDER THE NEW UNCERTAINTY SCENARIO FINANCING SME IN THE BRAZILIAN CONTEXTFINANCING SME IN THE BRAZILIAN CONTEXT SEBRAE´S LEADING STRATEGY FOR SUPPORTING MSE FINANCING: SEBRAE´S LEADING STRATEGY FOR SUPPORTING MSE FINANCING: REDUCING THE GAPS

THE BRAZILIAN ECONOMIC MODEL 1.INFLATION TARGET 2.FISCAL RESPONSIBILITY 3.FLOATING EXCHANGE RATES

INFLATION (CPI) % Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 17,24% consenso 2008: 4,5% Fonte: IBGE, Bacen 12 months Meta 4,5%

PUBLIC SETOR DEBT/GDP Fonte: BCB % PIB Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jul 40,6%

US$ bilhões FOREIGN EXCHANGE RESERVES Fonte: BCB Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Set 08 abr 15,9 23 Set 206,1

Fonte: BCB EXTERNAL VULNERABILITY Ago % DEBT SERVICES/GDP DEBT/GDP %

% BRAZIL GDP GROWTH RATE Fonte: IBGE T 99 1T 00 1T 01 1T 02 1T 03 1T 04 1T 05 1T 06 1T 07 2T 08 6,0% AVG ,9% AVG ,8%

COMPARING REGIONS... Fonte: FMI EUAÁrea EuroJapãoMundo Estimated 2008 (oct/07) estimated 2008 (atual) estimated 2009 (atual) % 2,9 0,8 2,8 1,2 5,1 3,9

Argentina México Brasil Coréia Filipinas Chile Tailândia Malásia % do PIB 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 INFORMALS SMALL BUSINESS INFORMATION NEGOTIATION GUARANTEES MICROFINANCE

HOW TO REDUCE INFORMATIONAL COSTS AND CREDIT RISKS? From the individual analysis and to business groups COLLECTIVE INDIVIDUAL 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...

ALEXANDRE GUERRA DE ARAUJO