Informal SMEs Regain Trust

There was a modest improvement in the II Quarter and the expectations are positive for the IV Quarter of 2020

The perception that informal entrepreneurs have in El Salvador regarding the economic situation of their business units improved by 29.8% during the III Quarter of 2020, according to the results of the SMEs Quarterly Dynamic Survey on Business Opinion, made by FUSAI’s SMEs OBSERVATORY.

SMEs Entrepreneurs, similarly to formal entrepreneurs, make decisions about their business whilst taking into consideration the perspective of their businesses over time. The business confidence index synthesizes the current and future assessments made by entrepreneurs about their companies, regarding the tendencies in sales volume, investment, generated employment, and price-level of the products. This interpretation showcases certain degrees of confidence, and it describes the position of business owners on two possible scenarios, positive and pessimistic.

Entrepreneur’s expectations are a decisive factor when it comes to making decisions regarding investments, employment, prices, etc. At the same time, their perspective has a high level of influence on the economic growth of the country.

The indicators that serve as a reference to evaluate the data on business confidence are carried out quarterly.

The results of the study that correspond to the III Quarter of 2020 are showcased below.

FIGURE 1

The Business Confidence Index (fig. 1), for the III Quarter of 2020, has recovered by 29.8%, driven by the expectations that informal SMEs have for the IV Quarter and because of the presence of a moderate recovery, when compared to the II Quarter of the year. These results are based on a cut-off indicator established in June 2020. Below this number an assessment is considered to be negative, conversely, if the assessment is above it is marked as positive.

The indicator on the Current Situation (fig. 1-1) measures the difference between favorable and unfavorable responses regarding the performance of business owner’s companies, in comparison to the two quarters. This indicator ranges from – 100% (if all opinions are unfavorable) to + 100% (if all opinions are favorable).

Even though the results continue to be unfavorable, they showcase a significant improvement with regards to the assessment business owners make about the performance of their businesses during the III Trimester, compared to the II Trimester. Their valuation went from -72.9% of unfavorable over favorable to -28.7%.

Just like the Situation Indicator, the Expectation Indicator (fig. 1-2) oscillates between -100% and + 100%, and it synthetizes favorable and unfavorable opinions regarding how entrepreneurs expect their businesses to perform during the upcoming quarter, concerning the former one. (In the case of this study: Quarter IV is compared to Quarter III of 2020). The Expectation indicator shows that at the end of September 2020, 56.9% of entrepreneurs expected a better year-end than the one from the quarter that was just ending. This figure is well above the one that encompasses those who expect an unfavorable last quarter.

Figure 2.

Similarly to the previous indicator, the Investment indicator (fig. 1-4) denotes whether it is or isn’t the right moment to invest in businesses. 97.8% out of 100% of entrepreneurs believe that right now is not the time to make additional investments in their companies.

Regarding Employment (fig. 1-5), the indicator showcases a figure of 92.22%. The surveyed employers believe that right now is not the appropriate moment to hire more employees. Therefore, it can be inferred that during the III Quarter the informal SMEs sector continued to lose sources of work.

The last indicator, the Price Index (fig. 1-6), reflects to what level entrepreneurs consider the prices of their products as favorable or unfavorable concerning the growth of their companies. With a figure of 94.8%, the indicator reports that for business owners the prices of the products do not promote growth within their companies.

FIGURE 3.

Figure 3 reflects that all the economic sectors that encompass informal SMEs have regained confidence regarding the good performance of their companies. The best-positioned sector is the one of Production with an index of 162.8%, followed by Services with 133.5%, and Transportation with 130.6 %.

FIGURE 4.

Figure 4 explains how the Production sector went from being the one with the most pessimistic situation indicator -84.6% during Quarter II to being the least unfavored one -20.8% for the III Quarter. Also, it explains how It went from an expectation level of -84.6%, to being the one with the biggest level of expectation with 62.5%, regarding the good performance of businesses during the IV Quarter.

In this graph, business owners who said they expected a favorable Third Quarter exceeded those who answered that they expected an unfavorable Third Quarter by +26.2%. Hence, the expectation at the end of Quarter II +26.2% was positive in the Commerce Sector, which contrasts with the results of the existing situation throughout the III Quarter. To conclude, it can be inferred that even though the Commerce Sector had a favorable expectation for the Third Quarter, it didn’t end up achieving what it foresaw, and it went under entrepreneur’s expectations by -24.31% generating an unfavorable situation, compared to those who believed that their results were Favorable in the III Trimester.

FIGURE 5

Figure 5 presents all factors that informal entrepreneurs from micro and small enterprises consider as inhibitors for the good performance of their businesses.

Consecutively, once again for the Second Quarter, financial difficulties are the factor that has affected them the most. Also, it was the most relevant factor this last Quarter; 28% of business owners expressed that they were being affected and compromised by this situation.

Another factor that has proven to be relevant is the increase in competition (from 6.1% to 17.89% during the Third Quarter). Also, this contrasts with the impact that the decrease of demand has generated, which went from 11.1% in the II Quarter to 20.6% in the III Quarter. Namely, at the end of September 2020, SMEs have seen the demand for their business fall, which has affected their businesses with an increase in competition.

Conceptualizing SMEs segments with regard to their net incomes:

  • Subsistence Micro-enterprise: Economic units that generate an annual net income of up to US$ 14,400.
  • Micro-enterprise of Simple Accumulation: Economic units that generate an annual net income of up to US$ 50,000.
  • Micro-enterprise of Amplified Accumulation: Economic units that generate an annual net income of up to $ 100,000.
  • Small Enterprise:Economic Units that have the capacity to generate an annual net income of up to US$ 1,000,000.

Research Technical Sheet

Methodology: (a) 443 informal business owners from Micro and Small Enterprises; (b), The whole Country; (c), Margin of Error: 5% and Confidence level: 95%; (d), Respondents: Business owners; (e), Access to the form: through the web; (f), Processing of the Information: Surveys are coded and entered into a database that is cleaned and controlled from inconsistencies; (g), Timeframe: last week of September 2020. The information is analyzed by using a computerized information processing program.

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