Alejandro Soriano
Ejecutivo Senior de Sectores Productivos y Financieros de CAF
The global crisis over the spread of coronavirus and the recession it will cause in Latin America are unprecedented. According to a World Bank forecast, GDP in Latin America and the Caribbean (excluding Venezuela) is likely to contract by 4.6% in 2020, while the IMF is estimating a 5.2% drop.
This is undoubtedly a moment of reflection, analysis and immediate action that governments will have to take to improve their healthcare systems and, also, to put in place effective support mechanisms to help MSMEs weather the storm.
In the MSME sector, characterized by a large informal economy but an important source of jobs, there is a great challenge for governments, multilateral entities, financial systems and corporations within the payment chain.
As regards the financial system, there are systems composed of public or mixed guarantee funds and private mutual guarantee societies. These entities play a leading role in the penetration of credit in favor of MSMEs and they complement financing institutions. A number of governments have taken immediate action in this regard.
China, for example, created a state funding guarantee fund of at least 60 billion yuan (USD 9.52 billion) to support small businesses and the agricultural sector. The Ministry of Finance estimates that the fund will help some 500,000 small businesses and micro-enterprises over the next three years with an additional 500 billion yuan in these loans, equivalent to a quarter of the country’s total financing guarantee dealings.
One of the measures approved by the Spanish government to minimize the economic impact of COVID-19 is the provision of public guarantees of up to 100 billion euros to ensure liquidity of companies, with funds administered by the Official Credit Institute (ICO), in several tranches. The first 20-billion tranche is intended for renewals and new loans to freelancers and SMEs (companies with fewer than 250 workers and a turnover of less than or equal to 50 million euros or with a balance sheet not exceeding 43 million euros), as well as for larger companies.
While the ICO has become the focus of Spanish government guarantees in favor of SMEs affected by the COVID-19 crisis, mutual guarantee societies (MGSs) have also launched very effective guarantee and aid packages.
In Latin America, guarantee funds have not yet implemented relevant actions to address the crisis in these companies, in part because banks and financial institutions have taken immediate action (payment term restructuring) to alleviate debts and ensure corporate liquidity, but that is a short-term measure, partly because commission costs can be cut only to a certain extent, and in part because risk coverage is not appealing enough for banks in such a crisis situation.
Peru and Colombia are the exception. In Peru, the government issued a new guarantee instrument called the “REACTIVA PERU” Program, administered by COFIDE, the nation’s development bank. It is a guarantee program to replenish working capital of companies facing short-term payments and obligations with their workers (wages and similar) and suppliers of goods and service providers, in order to ensure continuity in the payment chain in the national economy.
The guarantees of the REACTIVA PERU Program are only applicable when they are used exclusively in operations of the Central Reserve Bank of Peru (BCRP) and are up to 30 billion soles (approximately USD 9 billion). The term of the loans granted by financial institutions to beneficiary companies may not exceed 36 months, including an interest and principal grace period of 12 months.
On the other hand, Colombia approved a capitalization plan for the National Guarantee Fund that would expand the financing capacity of MSMEs through the financial system.
The rest of the countries in the region are likely to take similar measures in the short term, as the capillary character of these instruments may be the most effective tool in reviving the economy at this trying time.
Guarantee funds must be part of the “before and after” picture of the pandemic, demonstrating their strategic importance for financial systems and for the business system.
