Companies Stuck In Subprime Mire

The Age

Wednesday May 28, 2008

Philip Hopkins

THE credit crunch arising from the US subprime mortgage crisis has started to hit Australian small and medium enterprises, affecting their investment decisions and growth plans.

The third PricewaterhouseCoopers Private Business Barometer has found an overwhelming consensus that funding is the main challenge facing private business.

Just more than half the businesses in the survey nominated the shortage of credit as a big impediment to meeting revenue targets.

A total of 32.9% have experienced a big increase in the cost of borrowings due to the credit crunch.

Further, 32.2% now have a more conservative outlook regarding their near-term plans.

Despite this uncertainty, most private businesses are still upbeat about the medium-term economic outlook. Profits are strong and there is some caution about hiring, but organic growth is the preferred way to expand.

The PwC barometer, compiled with East & Partners, surveys more than 750 private businesses with annual turnovers of $10 million to $100 million.

East's principal analyst, Paul Dowling, said the findings showed that the effects of the US subprime crisis were trickling through to private business.

Mr Dowling said most businesses had fixed-rate loans, which helped fuel their long-term optimism, but there was concern about the global credit crunch.

Until the effects of the subprime mortgage crisis were clarified, "businesses are proceeding with optimism sprinkled with an element of caution", he said.

PwC partner Greg Will said the survey was important because most of the businesses were coping with uncertainty for the first time. Only 12.3% of those surveyed had started business before 1995.

Mr Will said almost half the businesses were less likely than a year ago to make substantial investments. For the rest, bank funding and equity capital were preferred, he said. Private equity was not an option for most because they did not understand it.

Suncorp chief executive John Mulcahy will speak in Brisbane next week on the subprime crisis. He will discuss how the crisis has affected the trust and confidence of investors, government and the community.

Victorian Employers Chamber of Commerce and Industry chief economist Steven Wojtkiw said PwC's findings broadly aligned with VECCI's surveys. "There are still positive trading conditions, but they are softer compared with a year ago," he said.

Mr Wojtkiw said credit was an underlying influence on the business outlook. But this did not just relate to the fallout from the subprime crisis, which had made bank credit more expensive, he said. Reserve Bank rate rises had also dampened borrowing. "There have also been quasi-rate rises from the effect of higher fuel prices," he said.

Another survey, the UPS Asia Business Monitor, found that two-thirds of small and medium enterprises in Australia said prospects this year were better than last year, but retaining quality staff was a challenge.

UPS Australia managing director Jeff Fairbairn said almost half the 100 companies surveyed regarded the economic emergence of China as a boost.

LINK: www.pwc.com/au

© 2008 The Age

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