One into the Pandemic... How Can We Support Businesses?

About a year ago we were trying to understand and assess the potential impact of the new pandemic on the economy and businesses. Forecasts were a veritable alphabet soup: Some analysts projected a V-shaped recovery, others a W-shaped trend, others a K- or U-shaped curve, etc.

Governments of our region were concerned—and rightly so—about the future of businesses. After all, it was necessary to minimize the most immediate risks of widespread impact and thus safeguard productive assets and jobs. To this end, they rescheduled payments of corporate debts and taxes and developed liquidity and guarantee instruments. Some governments have also offered support for labor costs.

The expectation was that the pandemic would be under control by the second half of 2020, the economic crisis would subside, and businesses would pick up pace again. While the financial cost for governments were tremendous, emergency support to businesses were justified, as the benefits for society would outweigh the risks.

The support policies implemented were, in many cases, broad-based, and companies of different industries and characteristics, including those that were barely afloat before the pandemic or did not even need public funding, were eligible for these benefits. Estimates show that millions of companies in the region have had access to at least some form of support.

But then again the virus took everyone by surprise and resisted various containment attempts. We are currently experiencing the third wave of the pandemic, the expected recovery is yet to come, and companies are still under pressure. Hopes now lie in the hope that vaccination can move forward and help the region’s economies get back on track in the second half of this year.

But while going back to normal is not enough, concerns about businesses continue to mount, especially about SMEs. Debt rescheduling is coming—or it has come—to an end, liquidity programs have been terminated, and governments are under great fiscal stress, which hinders or limits the ability to extend such programs. Many SMEs not only suffer from immediate liquidity problems, but also solvency risks. After all, they have gone into debt and have accumulated losses.

A possible consequence could be a large wave of breakwater dams with significant economic and social implications and also impacts on financial systems, which could entail even greater obstacles for going back to normal.

The risk of insolvency waves is global, not just for Latin America, but it becomes especially serious in the region due to the vulnerabilities of our companies, which are characterized by informal labor, low productivity and competitiveness and low commitment to innovation and internationalization.

The IMF study on the insolvency risks of SMEs during the pandemic, conducted with a sample of advanced countries, suggests that 20 million jobs in these countries could disappear in the short term, which accounts for 13% of employment in the respective businesses, effectively doubling the unemployment rate. Given the weaknesses of our SMEs and economic and healthcare conditions, it seems reasonable to assume that this rate would be much higher here.

In this complex context, what can we do? It is clear that companies will continue to need support, but the responsiveness of governments and banks is not the same as it was a year ago. Thus, considering the limited fiscal room for maneuver, the lower risk appetite of banks and the need to protect economies from systemic risks, it may be necessary to focus efforts on supporting businesses with a view to improving effectiveness with scarce public funds, and promoting faster economic revival.

One possibility is to mainly support promising SMEs with relatively greater reaction and growth potential. These are companies that, because of their adaptability, technology and innovation, business models, industry, consumer preferences and other features, would have greater potential to create new jobs and enhance recovery. In addition, SMEs should be supported in strategic sectors such as goods and services essential for the operation of production chains, and essential goods and services for businesses, families and governments.

In view of these extraordinary current conditions, the support instruments should also be extraordinary. New lines of credit and new specific guarantees and less-than-conventional instruments should be considered, such as fresh capital injection, debt-to-equity swaps, preferably subject to meeting relevant targets and exit rules, among other instruments.

Another way forward could be to introduce special transitional legislation to facilitate the restructuring of potentially viable companies, rather than liquidation often accelerated by specialized courts, and legislation that encourages restructuring by arbitration tribunals.

Obviously, the great challenges of such policies are the design, identification of companies and operation of instruments. To mitigate the risks in the conflict between lack of liquidity and insolvency of companies and increase their impact, partnerships with banks, FinTech companies and other specialized institutions could be forged in order to identify and assess businesses and share part of the risk in a viable way for all.

Unfortunately, there is no consolidated empirical evidence to guide us at this point, and we do not know if measures like these will work as effectively as planned. Therefore, some trial and error may be required, while being flexible and designing policies with exit strategies that allow for adjustments, when necessary. The greatest risk at this point is not to make mistakes, but to do nothing.