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Analysis: COVID-19 Could Cause Over 2.7 Million SMEs in Latin America to Close

RIO DE JANEIRO, BRAZIL – At least 2.7 million businesses are expected to close in Latin America – most of them small and medium-size businesses (SMEs) – as a result of the economic shock caused by the COVID-19 pandemic, the US consulting firm Boston Consulting Group (BCG) said in a report on Friday, December 11th.

The traffic flows in the streets of Latin American cities that make them vibrate daily are largely due to the thousands of small and medium-sized businesses – restaurants, theaters, neighborhood stores – that this year were forced to pull down their blinds because of quarantines and social restrictions caused by the pandemic.

The report laments the fact that although governments and some companies have provided aid, this “is still not enough”. And there is concern that a second wave of COVID-19, which the Pan American Health Organisation (PAHO) warned about this week in countries such as Brazil and Central America, could be a serious threat to small businesses.

At least 2.7 million businesses are expected to close in Latin America - most of them SMEs - as a result of the economic shock caused by the COVID-19 pandemic, the US consulting firm Boston Consulting Group (BCG) said in a report on Friday, December 11th.
At least 2.7 million businesses are expected to close in Latin America as a result of the economic shock caused by the COVID-19 pandemic. (Photo internet reproduction)

Informality: the face of Latin American SMEs

The particularity of Latin American SMEs is that an important part of the sector is informal. And this, at the start of quarantine, was a source of distress for many of them given their “very limited financial cushion to tackle difficult times,” Luke Pototschnik, general manager and senior partner of the BCG New York office, explained.

On average, in developing countries, “hotel businesses have only two or three weeks of savings,” he said. In Brazil, where the hospitality sector accounted for 8% of GDP and employment in 2019, one in four bars and restaurants had closed permanently by September.

Given the dramatic situation, a stream of news on aid credits from within and beyond Latin American countries spearheaded efforts to assist small and medium-sized businesses. For instance, the US International Development Finance Corporation approved a US$200 million loan for a local bank in Guatemala (the Banco Industrial) to extend loans to SMEs.

For her part, the governor of Puerto Rico, Wanda Vázquez, announced in June the disbursement of US$115 million in stimulus packages to small and medium-sized businesses impacted by the pandemic.

Although the loans are a major boost, many SMEs “lack direct connection with the governments and financial institutions from which they could potentially receive assistance,” the study notes.

“It can be difficult for less sophisticated businesses to navigate the systems to successfully apply for funds” and they are “more likely to face delays in receiving funds,” Pototschnik said.

It is therefore a challenge for “unbanked informal businesses outside the formal economy to leverage this support. It is estimated that by 2016, 30% of GDP will lie in the informal economy,” the researcher added.

Furthermore, it was impossible for most SMEs to migrate to home office work. Forty-five per cent of SMEs in countries with less robust economies depend on jobs that live off “intensive” contact and only 20% can do so remotely, as reported by the International Monetary Fund (IMF) in a report shared by the BCG.

Globally, it is estimated that 23% of GDP in 2016 will be produced by the informal economy. These figures are even higher in developing countries. For instance, in Brazil, the informal economy generated approximately 37% of GDP in 2016, according to the consultancy’s research.

Consequently, the pandemic crisis caused a succession of small informal business shutdowns in Latin America.

Pototschnik notes that more “than 12% of food and beverage establishments in Colombia closed in March and April 2020” and that, in Brazil, “the Rio Times reported in September that 25% of bars and restaurants – some 250,000 – had closed.”

“In contrast, between June and August 2020, fewer than 500 restaurants closed permanently in Berlin,” the researcher emphasizes.

The most affected were women, who in sectors like the hospitality industry represent a “disproportionately high percentage of the workforce: 56%, while in developing countries it is 70%” argues Pototschnik.

Macroeconomic figures prove this: in Colombia, for instance, women faced a 28% reduction in employment between April 2019 and April 2020, compared to an 18% reduction in employment for men.

Fear of a second wave

According to Pototschnik, a second wave may compound the challenges SMEs have been facing by “reinventing biosafety measures, adjusting to working hours restrictions, and being dependent on changing government policies and consumer confidence.”

In markets such as Latin America, SMEs “on average, have less than three weeks of cash reserves available, making it very difficult to circumvent these shocks,” and businesses may not have “the range and financial muscle to survive the next shock.”

Furthermore, they must adapt to health and safety measures and ensure “social distancing, adequate sanitation or switch to contactless digital practices whenever possible.”

In that respect, he highlights AB InBev’s initiative and its online platform in Latin America, Tienda Cerca, to facilitate online orders for in-store delivery and collection. In Colombia, they are assisting over 65,000 stores. “We anticipate that this shift will remain,” warns the researcher.

Recovery plan is urgently needed

The BCG warns that the virus threatens to destroy all social and economic achievements by SMEs over the past 15 years, as both the IMF and the World Bank project that Latin America will see the largest percentage decline in real GDP in 2020 of all developing regions.

For this reason, the BCG believes that “it is vital to develop a recovery plan” that includes all players in society; business, government, the financial sector, etc., to drive economic recovery for all.”

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