«In the midst of immense difficulties, preserving coordination and cooperation, both within and between countries, will make a difference in the recovery phase.»
With an uncertain outlook on the evolution of the pandemic and its impacts, we do not know how many mimesis will survive the onslaught of COVID-19.
What we do know is how to promote public policies and mechanisms to help these companies improve their financial situation, stay in the market and grow in the short and medium term.
Micro, small and medium-sized enterprises (MSMEs)
they bring the economies of Latin America and the Caribbean (LAC) to life. They represent 99.5% of all companies in the region and 60% of the employed population and are responsible for 25% of the regional gross domestic product (GDP),
We all know someone who owns one of these companies, which are part of our daily lives as Latin Americans. Many times our relationship with these microenterprises is based on trust and physical closeness, which makes them the most affordable solution to meet our consumption needs.
The situation is still striking when we look at the figures of local banks in the region and find that, in aggregate, financial systems have a lot of liquidity and solvency, but they are shallow.
Typically, the latter concept measures the ratio of domestic credit to the private sector to GDP, which is a measure of the financial sector’s ability to finance real sector activity.
For reference, the U.S. number is 198.9%, while the average for LAC is 47.4%. That is, our level of credit to the private sector is a quarter that of the United States.
Structural barriers to financing
MSMEs have several characteristics that prevent their access to finance in the region. Among the main barriers identified are informality, the lack of a physical property or a guarantee of commitment, the lack of a solidarity company or guarantor, the low formalization of the company and low credit ratings.
These barriers are also exacerbated by the absence or inadequacy of mobile guarantee laws, the lack of a guarantee register and the lack of guarantee funds.
Emergency measures to support MSMEs in the face of COVID-19
At the time of writing, there are 1.9 million cumulative cases of infections and more than 74,000 deaths from the COVID-19 pandemic in LAC. The already complicated financing situation for MSMEs has worsened as a result of the economic and social effects of the pandemic.
Measures taken by countries
in the midst of the health emergency include mandatory quarantine and restriction of movement, so small businesses ceased to be part of everyday life and went to exceptionality.
Many of them have remained closed for months and therefore have stopped billing, their cash flows have been affected, and with it, the employment and wages of millions of families in the region.
Governments have also taken measures to mitigate the effects of the pandemic on MSMEs, such as moratoriums and postponement of payments for credits, direct subsidies to companies and employees, among many others.
It is unclear how many of the MSMEs will mercilessly survive the merciless onslaught of COVID-19, given that the period of time in which the disease will cease to have economic consequences is still uncertain. What to do in this situation?
Especially those in non-essential sectors, which before the pandemic had healthy financial statements, and whose businesses could survive once it ends, financial mechanisms must be created that allow them to survive the period with reduced incomes.
For example, «bridge» credit mechanisms could be created with subsidized and long-term rates, as well as more creative instruments such as the use of movable guarantees or lines that use the repurchase of assets of MSMEs as collateral to obtain credit.
It is also important to create mechanisms that allow viable companies to restructure their debt or access capital to reactivate their businesses.
In this regard, it is vital that the regulatory frameworks and institutional capacity of the countries of our region be reviewed to carry out processes of reorganization (restructuring) and resolution (judicial liquidation) of companies.
This will allow an orderly transition or exit from the market to those companies that definitely do not manage to survive COVID-19.
In Latin America, countries have taken various measures to avoid an unprecedented economic downturn.
In the financial field, for example, some have strengthened or expanded their guarantee systems to facilitate credit to companies; have eased bank reserve requirements to expand liquidity; have established temporary rules to allow banks to restructure loans or extend terms and moratoriums on installment payments, among others.
Others have directly established working capital lines of credit for MSMEs, and have created funds to support financial sector operations towards businesses.
Not all these measures are articulated to serve in a differentiated way the different segments of companies and their particular needs. The governments of the region are doing well with the rapid responses to the containment of the pandemic, but they have to establish exit strategies now, with instruments for the recovery of productive activity, once the contagion curve is flattened.