Report on the State of Small and Medium-Sized Enterprises in the Slovak Republic in 2020

189

The presented Report on the State of Small and Medium-Sized Enterprises in the Slovak Republic in 2020 presents a comprehensive view of the state and development of the business environment in the SME sector and SME support in the period under review. The purpose of the Report is to highlight developments and the most significant legislative changes adopted and effective in the monitored year that have an impact on small and medium-sized enterprises. At the same time, it seeks to highlight existing barriers together with proposals for measures to improve the business environment for the benefit of SMEs.

The importance of small and medium-sized enterprises in the Slovak economy is described by several indicators. Small and medium-sized enterprises account for 99.9 % of the total number of business entities in the Slovak economy. They account for almost two-thirds of employment in the business economy and contribute more than half of total value added.

The year 2020 was exceptional in terms of the development of exogenous factors that changed the development of both the Slovak and the global economy in an extraordinary way. The COVID-19 pandemic was unquestioningly central to the economic environment in 2020. The year 2020 was not only characterised by a significant drop in economic performance. The spread of a new type of coronavirus in 2020 was also largely associated with a relatively high level of uncertainty and risk, primarily based on the evolution of the epidemiological situation, which is also linked to the economic activity of business entities.

The performance of the Slovak economy slumped due to the pandemic after years of continuous growth.The recorded decline was steepest in the second quarter of 2020, in which a decline of almost 11 % was recorded. In the second half of the year, the Slovak economy managed to moderate the pace of its decline. GDP decline in the second half of the year was much lower (it was -2.1 % in the fourth quarter).

The decline in economic activity did not occur only in Slovakia, but was also characteristic of other countries. In the European Union as a whole, economic performance contracted by 6.1 %, mainly due to the slump in the major EU economies. Among the V4 countries, Poland recorded the lowest year-on-year decline in economic performance. Slovakia and Hungary ranked significantly behind Poland. As a result of the complex pandemic situation, the Czech Republic experienced the deepest slump of the Visegrad Group countries.

In terms of the production side of the gross domestic product development, the economic slump of the Slovak economy was related to a decline in gross output (by 9.0 %), intermediate consumption (by 11.7 %) and value added (by 4.7 %). Net taxes on products decreased by 4.8 % year-on-year. The downturn in the Slovak economy was also related to a decline in domestic demand. Household final consumption decreased by 1.1 %. Government final consumption stagnated after previous growth. Investment activity also experienced a negative trend in 2020. Gross capital formation fell by 12 % year-on-year. Total exports of goods and services also decreased by 7.5 % compared to 2019. Goods and services worth EUR 78,469.8 million were exported from Slovakia.

The decline in the performance of the Slovak economy was also reflected in the labour market. In the months of April and May 2020, there have already been year-on-year declines in employment across almost the entire spectrum of industries. The relaxation of anti-pandemic measures during the summer of 2020 has contributed to a temporary improvement in the labour market situation. At the beginning of the fourth quarter of 2020, the labour market situation deteriorated again, due to the second wave of the pandemic and the tightening of restrictions. Entrepreneurs operating in the accommodation and restaurant services sector in particular had problems retaining their employees. The construction and industrial sectors were among the other sectors with a significant decline in employment. The only sector of the economy in which labour demand grew was the information and communication services sector.

In 2020, SMEs accounted for 74.2 % of employment in the business economy. The share of SMEs in total employment in the Slovak economy was 59.1 %. Despite support measures to maintain employment, the average number of persons employed in the category of small and medium-sized enterprises (including natural persons – entrepreneurs) decreased year-on-year by 2.1 % (i.e. by 29.9 thousand persons) to 1,400.9 thousand persons employed. Employment declined year-on-year in all size categories and legal forms except micro-enterprises, which recorded a 1.4 % year-on-year increase in the number of persons employed. Small enterprises (down 4.5 % year-on-year) and medium-sized enterprises (down 3.3 %) struggled to retain employees.

The negative impact of the corona crisis on the Slovak economy was also reflected in the economic performance of the small and medium-sized enterprise sector. The unfavourable economic situation affected all monitored economic indicators of SMEs. The value added of SMEs – legal entities decreased by 3.8 % year-on-year. Although negative results were recorded in all size categories, the most significant drop in value added was recorded by small enterprises. Industry remained the most important sector in terms of SME value added. Labour productivity also confirmed the lower level of economic performance of the Slovak SME sector. In the EU-27, labour productivity in SMEs is more than twice as high as in Slovakia. The gross output of SMEs – legal entities also decreased (by 4.8 % year-on-year). Gross fixed capital formation of SMEs declined by 13.6 % and profit before tax of corporate SMEs decreased by 11.8 % year-on-year.

In 2020, the growth trend in the number of active business entities was also suspended. According to the data of the Statistical Office of the Slovak Republic, the achieved growth in the number of active SME business entities was only 0.3 %, which was influenced by the negative contribution of small and medium-sized enterprises. Micro-enterprises have managed to maintain their dominance. Their share was 97.2 %. Slovakia is also characterised by the highest share of micro-enterprises in the EU countries in the size category of micro-enterprises.

The SME entrepreneurship rate remained almost unchanged at 21.8 % in 2020. Slovakia ranks among the EU countries with the highest number of small and medium-sized enterprises in relation to the total population.

In 2020, the number of active natural persons – entrepreneurs decreased by 2.9 % after the previous increase. The decline is mainly due to the lower number of sole traders as the most important legal form of natural persons – entrepreneurs.

The pandemic has also contributed to a reduction in the number of new businesses in 2020. According to the data, there has been a 2% reduction in the number of SMEs created
(or by 1,709 business entities). Interest in going into business has increased among                     self-employed farmers and freelancers.

Paradoxically, the situation associated with COVID-19 and the measures taken to prevent the spread of the coronavirus in order to protect the life and health of the population in 2020 have not led to an increase in the number of disappeared entities. Conversely, the number of terminations decreased by 15.1 %, to a total of 47,648 business closures. The lower number of business closures is also due to the adoption of coronavirus support measures, the use of which was conditional on the maintenance of business activity. The number of disappearances decreased most significantly in the liberal professions (by 32.1 %). Closures of enterprises – legal entities did not change significantly year-on-year.

More than four-fifths of the total number of disappeared entities were sole traders (82.1 %). The year-on-year evolution of the net increase in business entities was therefore 
to a significant extent influenced by the development of the number of entities that were closed. Compared to 2019, the amount of net increase increased by almost one-quarter (23.4 %) to 35,526 business entities.

The gender structure of natural persons – entrepreneurs did not change significantly in 2020. The representation of women among natural persons – entrepreneurs remained at 28.2 %, identical to 2019. In terms of individual legal forms of natural        persons – entrepreneurs, the representation of women shows differentiated results. The highest proportion of women is among freelancers (49.8 %). The share of women in the legal form of sole traders is considerably lower (26.7 %). The development of the age structure of natural                    persons – entrepreneurs in the medium term is characterized by an increase in the representation of entrepreneurs in the younger age categories less than 30 years old. In recent years, there has also been a slight increase in the representation of older entrepreneurs aged 60 and over. The largest number of natural persons – entrepreneurs is in the age category of 40–49 year olds.

In line with the long-term development tendencies observed in the sectoral structure of SMEs, entities operating in the services sector had the most significant representation in 2020 (47.4 %). The construction sector has shown a slight increase in representation in recent years, accounting for 18.1 % of all entities within the SME size category in 2020. 16.9 % of SMEs were active in trade, 13.6 % in industry and 4.0 % in agriculture.

Disrupted buyer-supplier chains during 2020 (especially during the first wave) and declining demand have also negatively impacted our export-oriented SMEs. According to the preliminary data of the Statistical Office of the Slovak Republic, there was a decline in exports, which amounted to 3.1 % in the year under review. The decline in export activities was recorded for all size categories of enterprises, but most significantly on the side of medium-sized enterprises (by 4.0 %). Small enterprises (3.1 %) and micro-enterprises (1.6 %) recorded a slightly lower decline, which contrasts with the evolution of the share of SMEs in total exports. Given that the decline in exports of large enterprises was more pronounced (by 9.8 %), there was a year-on-year increase in the share of SMEs in total exports (by 1.5 p.p.). The territorial structure of SME exports is characterised by strong links to the EU common market. Only 11.7 % of total SME exports went to non-EU countries. Compared to other EU countries, SMEs in Slovakia have the lowest share of total exports to third countries.

The business environment in Slovakia is characterised by frequent legislative changes which, among other things, affect the obligations and requirements affecting the SME sector. In 2020, a number of important pieces of legislation were passed (and effective) to respond to address the emergency situation that arose in the Slovak Republic due to the outbreak of the COVID-19 pandemic in the economic, social and economic spheres. The legislation was primarily aimed at reducing and minimising the negative impacts of the pandemic. Among the most important of these is the entry into effect of Act No. 198/2020 Coll. – “Lex corona”. A package of 115 measures to improve the business environment and reduce the administrative burden has been reflected in the text of the law. Most of the measures have been reflected in the text of specific laws. Others include: the introduction of tenant protection and temporary protection for entrepreneurs; the provision of financial assistance to ensure the liquidity of SMEs; the regulation of the provision of rent subsidies; the provision of subsidies to support small and medium-sized enterprises; the suspension of trades for less than 6 months; the regulation of the so-called “home-office”; as well as other provisions of emergency measures in connection with the pandemic of the COVID-19 disease in the financial sector, among others.

The total amount of support for SMEs in 2020 in the context of the COVID-19 pandemic was many times higher than in previous years. In terms of the structure of the forms of financing of regular support (excluding the so-called COVID support), the direct form of support dominated, accounting for 79.1 % of the total support for SMEs. The indirect form of support amounted to 20.9 % in the case of ordinary support (a slight year-on-year increase in the indirect form of support). The overall real use of ordinary support was lower year-on-year. The main reason for this was that funds earmarked for planned activities in the current year were partly reallocated (and/or also increased) and accumulated in instruments and measures with the intention of mitigating the negative impacts of the COVID-19 pandemic. The most significant share of support for SMEs in terms of individual categories of ordinary support was accounted for by the category of subsidies, NFA, grants (42.9 % of the total support provided to SMEs) and the category of credits or loans (30.2 %). In the context of the evaluation of the COVID support provided to the SME sector in 2020, it can be stated that financial or direct support prevailed. The most important providers of COVID support included the Ministry of Labour, Social Affairs and Family of the Slovak Republic, the Ministry of Economy of the Slovak Republic and SIH. A more detailed overview of support for SMEs is given in Chapter 3.

In 2020, the Slovak Business Agency (hereinafter referred to as “SBA”) continued to meet its objectives in the area of providing comprehensive assistance targeted at the sector of small and medium-sized enterprises, while continuing to support them through the implementation of a number of national projects, offering a wide portfolio of services for SMEs and those interested in entrepreneurship, whether in Bratislava or in the individual regions of the Slovak Republic. SBA also implements international (pilot) projects for the purpose of opening up the topics of the “Small Business Act”.

SBA actively evaluated materials with an impact on the business environment, provided opinions and comments on proposals for new regulations through the Better Regulation Centre (hereinafter referred to as “BRC”). In the monitoring year, the BRC assessed (in terms of content and process) the realism of the impacts captured in all the Business Impact Analyses produced and provided detailed opinions containing suggestions for better capturing the impacts of the new regulation on the business environment.

The present Report on the State of Small and Medium-Sized Enterprises in the Slovak Republic in 2020 also contains a complex of proposals and recommendations, primarily for the purpose of supporting the continuous improvement of the business environment in the SME sector in relation to improve their competitiveness and support growth dynamics.

Supporting the creation and growth of businesses, especially small and medium-sized enterprises, is one of the key activities that ultimately improves the performance not only of regions but also of the economy as a whole. In line with the needs of SMEs, it is therefore essential to continue to streamline support for SMEs (at both regional and national level). Entrepreneurship support is an important tool for the development and stabilisation of the business sector and the competitiveness of the country. In order to promote a stable business environment, it is necessary to continue systematic cooperation and a coordinated approach of all involved ministries, as well as to take into account the suggestions and recommendations of individual entities. Mutual and intensive cooperation should be aimed at improving business conditions for SMEs.