Jorge Arbache
Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-
Under normal conditions, most SMEs in Latin America are estimated to be financially able to keep up with their overhead for a maximum of thirty days. It seems reasonable to assume, therefore, that a large share of these SMEs could go bust during the COVID-19 crisis, putting millions of companies at risk and stifling payment chains, which would exacerbate the adverse effects of the crisis.
In this context, many governments in the region have implemented public emergency business support programs. These programs have unlocked credit by offering partial lines of credit and guarantees, deferral programs for debt, financial and tax obligations, and temporary payroll support programs.
The programs brought new opportunities for companies with liquidity problems, which was crucial to protecting jobs and production. But changes in market conditions associated with the crisis, such as technological changes and consumption and income patterns, and uncertainties about the duration and shape of economic recovery, the possibility of a second wave of infections, and uncertainties about vaccine availability, have further exacerbated the situation of many companies. Indeed, in this unprecedented crisis it can be difficult to differentiate lack of liquidity from insolvency, even in companies that were supposedly strong even before the crisis.
It seems reasonable to assume that some of the companies benefiting from public programs may have solvency problems later on, probably after the end of grace periods for emergency financing and deferred payment of debts and taxes, which could become a trap for economic recovery. After all, emergency programs may postpone, but not prevent, the downfall of businesses.
The problem is that the survival of these companies is not neutral and can compromise the competitiveness of other companies with which they do business, become an entry barrier for new companies and stunt the growth of newcomers, stifle increase of average productivity of the economy, affect finance and public guarantee funds, and impact the quality of banks’ credit portfolio, compromising balance sheets and requiring increased funding, which could affect the availability of funds and risk appetite for new credit operations in the future.
A global GDP study suggests that 50% of companies will face debt service problems next year. It seems reasonable to assume that this share could be even higher among SMEs in the region.
This all points to the usefulness of having a kind of “credit key,” to allocate funds to companies rationally and efficiently to promote a healthy recovery. But unfortunately, the world is much more complicated than that. After all, in such a hostile context, there can be many false positives and false negatives in identifying weaknesses and survival conditions of companies.
The issue becomes particularly worrying when we consider the reality of most SMEs in the region, for which difficulties in accessing credit and markets and skills, management and technological deficiencies are rather the norm and ?not limited to periods of crisis.
What to do in this context? Of course, there is no single set of recommendations, as the measures depend on country-specific conditions, including the stage of the healthcare crisis, fiscal room for maneuver, financial system and institutions. However, there are issues of general interest.
A key strategy will be to move towards more sophisticated methods to define and identify SME problems in order to afford them adequate credit treatment. In this sense, innovative databases such as those used by FinTech companies, for example, could be used as additional credit assessment tools.
Public interventions could target the sustainability of business recovery. In this regard, support for emergency programs could be conditional on the active participation of companies in human resources training programs, improved management and incorporation and use of new technologies, especially those associated with digital transformation, in order to reduce costs and boost productivity and competitiveness.
Other recommendations could include debt swaps, SME portfolio securitization, and bankruptcy law reforms, which are largely inefficient and expedite bankruptcy of solvent and viable companies that are facing liquidity problems.
Lastly, any potential guideline limiting access to credit that could lead to the downfall of SMEs should be offset by minimum income and emergency jobs programs, in order to minimize the rise in unemployment and poverty and create income to support economic upturn.
The good news is that the healthcare crisis is already under control in several countries, the region’s economies are already showing signs of recovery and emergency policies are giving banks time to strengthen their liquidity reserves to meet potential needs. There are many uncertainties, but there is one true fact: proper and timely management of credit will be the determining factor for the economy to bounce back and stay on track.
