RIO DE JANEIRO, BRAZIL – A year and a half of the pandemic has wreaked havoc on Latin America’s micro, small and medium-sized enterprises, the weakest link in the region’s economic fabric and whose recovery seems uphill due to endemic difficulties in accessing bank loans.
Valentina Saéz did “the impossible” to save her small grocery store in downtown Santiago de Chile, where she also sold daily meals. She visited all the bank branches in the neighborhood, applied for social assistance, and asked for money from everyone close to her, but she was forced to close at the end of April.
The new quarantine decreed at the beginning of that month emptied, even more, the office area where her premises were located. The search for funds was fruitless: “I spent months waiting for answers from the banks. I have always been an excellent payer, but this crisis has consumed me,” she admits.
“THEY ARE KEY TO RECOVERY”
Her business is one of the 2.7 million formal companies – 99% of which are MSMEs – that have closed down in the region since the beginning of the health crisis, which means the loss of at least 8.5 million jobs, according to the Economic Commission for Latin America and the Caribbean (ECLAC).
Fifty-three percent are retail businesses, followed by businesses dedicated to personal services, such as hairdressers, gyms and workshops (12%), and hotels and restaurants (11%).
“MSMEs are the ones that have suffered the most from the impacts of the crisis and, given that they are essentially oriented towards the domestic market, their chances of recovery are associated with the GDP and the measures launched by governments,” said the organization’s executive secretary, Alicia Bárcena.
The measures include, for example, the extension of the terms and scope of liquidity and credit measures, the co-financing of the payroll, and direct transfers to self-employed workers, said Bárcena.
The pandemic, which has already left 37.3 million people infected and 1.2 million dead in Latin America and is still keeping many economies operating at half speed, caused the regional GDP to fall by 7.1% in 2020, the greatest recession in the last 120 years.
Poverty and extreme poverty rates soared to 33.7% (209 million people) and 12.5% (78 million), respectively. At the same time, regional GDP per capita ended at the same level as in 2010, meaning that the region is facing a new lost decade, like the 1980s.
“The role of micro, small and medium enterprises in the reactivation of the economy is crucial,” Javier Paulinich, undersecretary of the Latin American and Caribbean Economic System (Sela), which will hold a high-level meeting entitled “A Roadmap for the Recovery of the Region’s MSMEs in the Post-Pandemic” next July 22, told the press.
After recalling that these companies contribute 61.2% of GDP and generate 61.2% of regional employment, the head of Sela called attention to the fact that MSMEs require a “comprehensive” approach, which implies dealing “simultaneously, and not in stages, with the structural problems that afflict them, such as informality, scarce financing and lack of digitalization.”
IMPROVING ACCESS TO CREDIT
The difficulty in accessing credit is, according to experts, the main stumbling block, especially for micro and small businesses.
“There is a kind of resistance among MSMEs when approaching a bank because they believe that interest rates are high,” said Paulinich.
Despite the sustained growth of the microfinance sector in Latin America, the level of penetration is very uneven. Countries such as Nicaragua, Bolivia, and El Salvador have estimated penetration levels of over 30%. In contrast, Venezuela, Argentina, and Brazil have levels of less than 5%, according to data from the Inter-American Development Bank.
Having deep financial systems (total credit/GDP) does not guarantee a developed microfinance sector: Chile, for example, is the South American country with the greatest difference between the percentage of total credit in relation to the gross domestic product (71.2%) and microfinance penetration (15.4%), according to the IDB.
Informality does not help either, which is why many governments have implemented incentives in recent months to incorporate as many companies as possible into the formal system.
There are also “market failures” related to the banks’ risk analysis methodology and transaction costs, since the loan amounts requested by MSMEs are usually low, “generating high transaction costs in the evaluation and transfer of funds,” said the head of ECLAC, Alicia Bárcena.
“It is tough for a bank to accept a wheelbarrow as collateral. We have to develop an imaginative formula where the collateral is not the main component for the loan,” concluded the Secretary of Sela.