Serial Mistakes Fueling Economic Crisis in Pandemic

RIO DE JANEIRO, BRAZIL – Over three months into the Covid-19 pandemic and thousands of small Brazilian businessmen are still feeling helpless as they seek resources. Those who still endure have had to accept loans with high-interest rates, less favorable payment conditions, or, in most cases, find their own way.

“Everything that has been explained so far about helping micro and small entrepreneurs is either confusing or not useful to us in practice,” says Juliana Galvão, who opened a cleaning services franchise in the North Zone of São Paulo with her husband in December, but, like the rest of the world, was taken by surprise by the novel coronavirus.

The search for financial aid began early in the pandemic, in March when she reports a mass cancellation of customers, consisting of individuals and companies. That month, the government announced the first aid for micro and small businesses through a R$40 (US$7,528) billion payroll line of credit.

However, this aid was ineffective, since entrepreneurs like Juliana suddenly found themselves short of money to pay the operation’s fixed cost, with the family’s income impaired.

The result: in late May, one month after the program’s announcement, less than R$2 billion of the pledged R$40 billion had been disbursed. This corresponds to 1.3 million employees benefited in over 79,000 companies, well below the 12.2 million employees and 1.4 million companies projected.

Helpless, the overwhelming majority of small entrepreneurs pursued other options and, like Juliana, found a dead end. A survey by SEBRAE (Brazilian Micro and Small Business Support Service), in partnership with the Getúlio Vargas Foundation, found that 86 percent of requests submitted between April 7th and May 5th were denied or are still under consideration. Since the start of isolation measures in Brazil, only 14 percent have been successful.

The survey heard 10,384 individual micro-entrepreneurs (MEI) and owners of micro and small businesses across the country. It also shows that the search for credit among this public is increasing. The number of people who said they were looking for credit increased from 30 to 38 percent in a month.

After receiving a flood of complaints, the Ministry of Economy and the Central Bank accepted the mistake in the program’s design and pledged adjustments. Last week a new plan was announced, the National Program to Support Microenterprises and Small Businesses (PRONAMPE), which offers a total guarantee of R$15.9 billion from the National Treasury to banks.

This time the small businesses joining must be allowed to dismiss part of the staff, which was formerly banned and also ended up driving away interested parties. Before that, the government was relying on private banks to take on part of the risk of loans.

“At a time of unprecedented uncertainty, in which bankruptcies are expected, particularly from the smaller companies that suffer from a lack of credit history, to accept 15 percent of the risk of default, even with the Treasury having taken on the other 85 percent, was a very high price for the institutions,” analyses Sérgio Vale, chief economist of MB Associates.

This would have been a good time to make better use of public banks, argues Lauro Gonzalez, coordinator of the Center for Studies in Microfinance and Financial Inclusion at FGV: “They exist to accept this risk when it is necessary; private banks cannot be expected to be the leading players in this program. The government should be the main player,” he says.

If the government had realized right away, as in countries like France, England, and the United States, that it should be the full guarantor of these loans, many entrepreneurs could be in a different situation.

The SEBRAE also shows in the survey that, although public banks are the most demanded by small businesses, with 63 percent of the requests of respondents, they offer the lowest success rate, behind the private and credit cooperatives.

“Now, three months after the worst start of the pandemic, we are still discussing design. The scenario is this: it ends up not reaching the tip adequately because it was badly designed in the past,” says Vale.

Brazil has over 15 million micro and small businesses, according to a survey by the SEBRAE late last year. Together, they add up to more than 40 percent of the country’s trade and represent almost 30 percent of the Gross Domestic Product (GDP).

This means that a failure to rescue the group has dramatic impacts on the economy as a whole. These small businesses are often managed in a very homely way, in which it is common not to differentiate between cash flow and the owner, Gonzalez notes.

“By not being able to operate the credit lines, the government ends up feeding the vicious circle of the recession, which can send a bunch of microentrepreneurs into a vulnerable situation and thousands of companies crashing, taking with them income and employment,” said Lauro Gonzalez, coordinator of the Center for Studies in Microfinance and Financial Inclusion at FGV.

“Ideally, these lines would help us withstand the blow for three, four, five, six months, we don’t know how long, and with a year’s grace, to start paying when everything is better balanced both in business and in personal life, but unfortunately that option was just an illusion,” says Alan Raineri, Juliana’s husband and partner.

The PRONAMPE’s line will also fail to resolve the couple’s shortfall, which is in their final stage of approving a request at Banco do Povo do Estado de São Paulo. The bank offers lower amounts but offers a grace period to start paying. They have been waiting 20 days for confirmation. According to the bank, the delay is due to high demand and not to a matter of criteria.

Having the money is not enough

In March, some ten days before the government asked Congress to pass a state of public calamity in Brazil, Economy Minister Paulo Guedes even said that R$5 billion would be enough to eradicate the coronavirus. At that time, the government had already announced the anticipation of the 13th-month retiree pay and, according to the Minister, was working on expanding the initiatives, while stressing that the fiscal balance should not be jeopardized.

Run over by the escalating health crisis, he had to yield. The resources that the government has set aside to tackle the crisis so far are not negligible. In relative terms, the over R$400 billion provided in the budget to tackle the pandemic (including all areas, not only health) is not far behind some developed economies. The challenge of implementing it, however, is much greater.

The design of emergency aid for casual workers has been defined amid tensions between the government and Congress. Initially, Paulo Guedes wanted the portion to be close to the Bolsa Família (Family Grant), of R$200. This figure was raised until legislators suggested R$500 and, subsequently, the government closed at R$600 to have the last word.

So far, about 50 million requests have been met by the program, which has also caused issues such as long lines and crowds in Caixa (federal savings bank) branches, not to mention the difficulty in mapping all aid applicants.

While the program has allowed the government to trace over 40 million people who were once “invisible”, as the Minister has reiterated, it has also been paid to thousands of people who fail to meet the criteria.

The backbone of the crisis

The difficulty is not only to grant credit and assistance but to implement health care expenses. Although the pandemic is nearing its peak, the federal government has only been able to use 28 percent of the R$44 billion earmarked budget for this purpose, according to a report by the Independent Fiscal Institution (IFI), linked to the Senate.

The government’s lack of coordination and President Jair Bolsonaro’s signals contrary to the World Health Organization’s (W.H.O.) recommended guidelines on health care in the fight against the pandemic ultimately deteriorated the economic team’s performance, according to Felipe Salto, the IFI’s executive director.

“The Executive has a very significant role in implementing public policies in our federal model, particularly in times of crisis, which require celerity. Passing resources and thinking that they will be implemented is not enough,” he says.

While the resources are stalled, states and municipalities in the front line of the fight against the disease are faced with more cases and deaths with insufficient structures. This is the case of states in the Northeast and interior of São Paulo, where ICU beds are close to their limit.

On Friday, the country broke the one million confirmed Covid-19 cases mark, according to data from the press consortium, which includes UOL, Folha de S.Paulo, O Estado de S. Paulo, O Globo, G1 and Extra. Since the start of the month, the country has an average of over 25,000 daily case records. Everything suggests that this weekend it will pass another mark – 50,000 deaths.

“We wouldn’t have that many deaths if we had enforced a strict and adequate quarantine from the outset, but in order to do that, the President would have to have set an example, and not send dubious signals to the population,” he says.

Bolsonaro challenged isolation from the start, encouraged the use of drugs with no scientific evidence, and tried to promote a blackout of disease data. The country has seen its third Minister of Health since the start of the pandemic, and economists are unanimous in saying it’s difficult to envisage a more robust rebound unless the disease is better controlled.

“The false dichotomy between economics and health in government discourse suggests that if it were possible to bypass the pandemic without avoiding costs, we would rebound more rapidly. In fact, the opposite is true,” says Salto.

Source: Exame