SME exporters could face higher borrowing costs
In the latest edition of World Risk Developments, Efic looks at the higher borrowing costs Australian SME exporters face compared to larger corporates.
Australian banks are reliant on deposits, offshore and domestic wholesale money markets to finance their loans. Interest rates in US-dollar denominated
markets have risen significantly since the start of the year, consistent with the outlook for US interest rates. In the domestic money market—where
banks borrow from each other at shorter tenors—higher offshore funding costs increase the demand for domestic funds, pushing up domestic rates
(Chart 1). This has occurred despite no change to the RBA’s cash rate. Australian banks have not yet passed on the higher costs to business borrowers.
But should funding costs remain elevated, banks will likely defend their margins. Higher interest rates would be particularly acute for SME borrowers,
including those that export.
Overall borrowing costs for SMEs have fallen over much of the last five years, driven by reductions in the cash rate. But loans to SMEs have become increasingly expensive compared to loans for larger corporates—the interest rate spread between corporate loans and SME loans has risen from 90 basis points on average between 2002 to 2007 to over 185 basis points between 2008 and 2018 (Chart 2). Unlike large corporates that can directly tap into capital markets to fund themselves, SMEs have very few alternative sources of finance. This leaves SMEs particularly vulnerable to higher forecast bank borrowing costs.
Other stories in the latest edition of World Risk Developments:
- World—tariff drama adds to weakening trade and investment
- UK—Brexit uncertainty is suffocating growth
- Indonesia—rate hikes to save rupiah compound growth headwinds
- Cambodia—elections risk sanctions that could cripple economy
- IItaly—populist coalition to test relations with the European Commission