Juan Carlos Elorza
Director de Análisis Técnico y Sectorial, CAF- banco de desarrollo de América Latina y el Caribe-
It is important to realize that lockdown measures, albeit necessary to contain the pandemic, have stifled about 50 percent of all economic activities. A wide array of factories have been forced to halt or shut down operations, while service and supply chains have made cuts to their activity, consumers have seen a contraction in their purchasing power, the tourism sector has experienced a drastic reduction in travel, and leisure service providers and schools have shut down operations.
The hardest hit sectors, and therefore those that need particular attention, are micro-, small- and medium-sized companies (MSMEs), which represent more than 99 percent of Latin American businesses, accounting for about 30 percent of GDP.
A quick review of the events affecting the Chinese economy may shed some light on how this crisis is expected to impact the region’s MSMEs. MSMEs also make up the vast majority of the Asian economies, creating 80 percent of jobs. A survey conducted in February by researchers at Tsinghua University on a sample of 995 MSMEs shows alarming figures, as some 30 percent of businesses saw their revenue drop by more than half, with more than a quarter reporting a drop of between 20 and 50 percent. In addition, a third of the surveyed businesses said that they could remain open for only one more month given their current cash flow, while less than 10 percent reported that they could remain open for more than six months. Also, 63 percent of respondents cited wage and social security payments as their main financial pressure, followed by rent and credit payments, at 14 percent each.
The lessons from the Chinese experience help to outline the package of measures aimed at counteracting the economic impact of the virus in the region. The nature of MSMEs in Latin America is primarily domestically oriented, and their performance has traditionally been linked to macroeconomic conditions. This means that, in times of economic downturn, smaller companies are more likely to go under.
In the face of this reality, a series of macroeconomic measures are needed to ensure continuity in the payment chain. In terms of credit flows, smaller companies must have immediate liquidity in order to overcome the pressure of wage obligations, while large ones will prefer tax breaks.
In the business services sector, critical within value chains, medium- and long-term credit must be enabled. The household services sector should be revitalized very quickly as demand recovers, so the need for support should be relatively limited, with relief and deferment of payments, and only in some cases with direct subsidies.
In Latin America, countries have taken a number of steps to avoid an unprecedented economic decline. In the financial field, for example, some have strengthened or expanded their coverage schemes to facilitate credit to businesses, and have relaxed their cash holding policies to expand liquidity, established temporary rules to allow banks to restructure loans, and extended deadlines and moratoriums for quota payments, among others. Others have established direct working capital credit lines for MSMEs and created funds to support companies’ financial sector operations.
However, not all of these measures are articulated to independently serve the variety of segments of companies and their particular needs. Governments in the region are doing well with the rapid responses to pandemic containment, but they have to establish exit strategies from now on, with tools to recover productive activity, once the contagion curve is “flattened.”
Fresh funds will be required, no longer to provide urgent liquidity, but to revive entire productive sectors. In this regard, international agencies will play the pivotal role of providing financial support and defining strategies. CAF, for instance, has already earmarked a USD 2.5 billion line to mitigate the adverse effects of the crisis, as well as specific support for development banking.
In the midst of immense difficulties, preserving coordination and cooperation, both within and between countries, will make a difference in the recovery phase.
