Wednesday, Oct 28, 2020
International Finance
Banking and Finance Magazine

Brazil’s new loan facility for SMEs

Feature_Brazil_SMEs
SMEs are vital to strengthen the Brazilian economy which continues to be one of the worst affected countries by coronavirus in Latam

Since the detection of coronavirus in China last year, the infection has spread far beyond the mainland to Latin America. It seems that Brazil is one of the worst affected countries in the region. In recent years, the country has established itself as an emerging economy and it accounts for nearly half of South America’s overall output.

Currently, Brazil is ranked the world’s eighth largest economy. However, the country has projected a fragile economy in the last few quarters — and the pandemic is only adding to the country’s economic woes. According to the International Monetary Fund, Brazil’s 2019 nominal GDP stood at $1.868 trillion.

On the downside, the country’s growth and fiscal outlook is shaping up to be worse than official government forecasts for this year. According to Treasury Secretary Mansueto Almeida, the public sector primary deficit this year excluding interest payments could reach $152 billion, or more than 11 percent of gross domestic product. That said, the economy is set to shrink around 6 percent to 7 percent.

It is also a highly indebted country with a government debt totalling to nearly $2 trillion. With Brazilian debt being a major component of most emerging bond portfolios, many believe a Brazilian economic crisis has the potential to roil world financial markets.

Brazil in the pandemic
The World Bank forecasts that the Brazilian economy will shrink 8 percent this year due to the Covid-19 crisis. The lockdown and social distancing measures introduced to help curb the spread of the infection has had a negative impact on its economy. Economists believe that the country could be one of the worst affected Latin American nations, overtaking Peru. Many fear that a contraction of around 8 percent to 10 percent of Brazil’s GDP could possibly lead to corporate bankruptcies, soaring government debt and surging unemployment in a nation with abject public finances.

Another issue that worries many experts is the issue of unemployment in the country. It is reported that only a third of the Brazilians have access to savings. The unemployment rate in the first quarter of 2020 was already soaring at 12.2 percent, which means around 13 million people are currently unemployed in the country. The crisis could see the number soar which is a very distressing factor for economists and policymakers. In fact, analysts say that the Covid-19 cases could rise to almost 19 percent this year leaving a devastating impact on its economy.

The pandemic has also impacted the consumption level in the country. In April, retail sales plummeted to a record month-on-month decline of 16.8 percent, according to reports. Sales excluding autos and construction materials fell 16.8 percent during the period between March and April and from the same period a year ago, observed statistics agency IBGE. Both records were steeper than the 11.9 percent monthly decline and 13.6 percent annual fall forecast. According to IBGE, the level of sales is now at its lowest since the series began in 2000 and down 22.7 percent from the peak in October 2014.

The sectors hardest hit in April were clothing and footwear which saw a 60.6 percent fall in sales. Also, books, magazines and newspapers fell 43.4 percent and other personal and domestic goods dropped 29.5 percent during that month. Supermarket, food, beverages and tobacco sales fell 11.8 percent, while pharmacy, medical and cosmetics sales dropped 17 percent, IBGE said.
This is particularly a huge blow for the Bolsonaro-led administration which has introduced measures to boost public spending after coming into power. The pandemic has severely impacted the vast informal sector that takes in about 40 million workers who are not included in official jobless statistics. People working in the informal sector are adversely affected by the pandemic in Brazil and other parts of the world.

To address the issue, Brazil’s economy ministry implemented a $120 monthly stipend to help sustain low-income and some informal workers during the pandemic. Also, the administration is working on a broader basic income scheme for Brazilians bearing the blow of the economic crisis, however, it is constrained by the country’s fragile finances. Goldman Sachs has predicted a fiscal deficit equal to 19 percent of gross domestic product this year.
As things stand, Brazil is one of the worst affected countries by the pandemic, second to the US. As of July 13, Brazil had recorded around 1.87 million cases and reported casualties of around 72,151. The states of Sao Paulo and Rio De Janeiro point to the worst affected. Earlier this month, Brazilian president Jair Bolsonaro also tested positive for coronavirus

Brazil’s response to the economic crisis
To deal with the double whammy of the economic slowdown and the impact of the Covid1-19 crisis, the Brazilian administration has introduced a myriad of measures this year. In March, the Federal Government published provisional measures that altered a series of labour regulations during the pandemic with the aim of helping companies and preserving jobs. KPMG reported that the provisional measures points to the adoption of telecommuting, anticipation of individual vacation and collective vacation concession with notice to the employer within 48 hours, use of holidays, special hours compensation scheme in the future in case of interruption of working hours and suspension of administrative requirements for safety and health at work.

During the same period, the Brazilian Senate approved a bill to provide $8.5 billion as aid to Brazilians and especially workers involved in the informal sector. The bill will result in the granting of emergency aid of $116 to informal workers and $232 to mothers responsible for supporting the family.

In April, the Ministry of Economy formalised the creation of 12 strategic task forces to address the economic impact of the protracted pandemic. The initiative aimed at supporting the Brazilian productive sector is being monitored by the Ministry of Economy through the Special Secretariat for Productivity, Employment and Competitiveness.

This was followed by the National Monetary Council (CMN) approving a series of measures to devise actions related to rural credit more flexible, ranging from extending deadlines for contracting credit to guarantee social distancing, according to the Ministry of Finance. As a result, rural producers in Brazil were able to access the credit line until June 30, 2021 to finance investments in works, purchase machinery and equipment and expansion of grain storage capacity. In addition, CMN also decided to relax rules for rural credit operations already contracted, aiming to adapt them to social distancing. In a remote session, the Senate approved a bill that provides financial assistance from the union to states and municipalities to try to reduce the impacts caused by the crisis. The union will transfer R$ 60 billion directly to states and municipalities, divided into four monthly instalments. The resources will be divided as follows:
R$ 50 billion: compensation for drop in revenue
R$ 10 billion: health and social assistance actions

Brazilian President Jair Bolsonaro signed the Complementary Law 173/2020 in May allowing a grant of R$ 60.15 billion federal aid to states, municipalities and the Federal District to strengthen actions of combating the pandemic. The new law establishes the Federative Program to Combat Pandemic caused by Covid-19 and changes the Law of Fiscal Responsibility. The programme’s objective is to support states and municipalities in combating the pandemic though suspension of debts with the union until the end of 2020, renegotiation of credit operations with the financial system and multilateral credit organisations, including debts guaranteed by the federal government and union financial assistance to federation entities in four equal monthly instalments totalling to R$ 60 billion.

Why are SMEs vital to Brazil?
Small and Medium Enterprises (SME) play a crucial role in building the Brazilian economy. The sector is reportedly responsible for the creation of employment for more than 56 million Brazilians. That the country is the world’s fifth largest economy by area and the sixth most populous in the world necessitates positive employment rate.

The role of SMEs in the economy has been long recognised. Their contributions include job creation, poverty reduction and achievement of higher levels of economic development. In fact, SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development. They also play an important role in economic growth and social inclusion in Brazil, accounting for 62 percent of total employment and 50 percent of national value added, slightly below the corresponding OECD averages of 70 percent and 55 percent respectively.

Their role in terms of production, employment generation, contribution to exports and facilitating equitable distribution of income is very critical. So stimulus packages for SMEs is vital for Brazil without which businesses might not be able to successfully weather the Covid-19 crisis.

If businesses are forced to shut down at a greater level, it would have severe economic consequences for the Brazilian economy. Over the years, the Brazilian government has introduced measures for the upliftment of the SME sector. Government loan subsidies are the main direct policy instrument used by the federal government to foster SME development.
The share of business loans by BNDES granted to SMEs increased significantly from 30.6 percent to 46.8 percent of the total during the period between 2016 and 2018. However, the SME sector in Brazil demands special attention from the administration during the pandemic.

Impact of new credit programme for SMEs
To help SMEs weather the Covid-19 storm, the Brazilian government has come with a credit programme. SMEs in Brazil represent 99 percent of the Brazilian enterprises in the country. They are responsible for 20 percent of the Gross National Product with $320 billion and 60 percent of all formal employment posts in Brazil which stands at 56.4 million, according to a report by Springer.

The new credit programme, known as Pronampe, is now available at Banco Cooperativo do Brasil. The programme was instituted by Law No. 13,999, of May 18, 2020 and aims to guarantee resources to stimulate and strengthen small businesses, in addition to maintaining jobs. Productivity and Competition Secretary Carlos da Costa said in a press conference that another 12 institutions, including two fintechs, are in the evaluation process to operate the programme.

The programme is designed to help SMEs to continue operations despite an economic crunch through the injection of credit. Authorities have allowed banks to extend loans to SMEs, to reduce reserve requirements — lowering banks’ requirements for contingent liabilities provisions and allowing firms to use real estate as collateral for new loans.

The credit programme launched by Brazil for small and midsize enterprises seeks to support lending in the segment while limiting its impact on banks’ credit risk, according to a Moody’s report. The programme is designed by Brazil’s government to inject funds to an investment guarantee fund, known as the FGI, that will leverage millions of dollars as loans to SMEs in Brazil, a segment heavily hit by the pandemic.. The government has announced that it will guarantee up to 80 percent of loans disbursed to companies with revenues between 360,000 reais and 300 million reais.

That said, the government has also boosted the guarantee coverage under a separate programme that extends low-cost credit facilities to small companies to 100 percent from 85 percent. According to Moody’s, other measures in the programme could include an interest rate limit on loans made under the programme.

In April, credit facilities and advances on credit card receivables used by small businesses in Brazil recorded a drastic drop in sales as a result of the counter measures introduced to deal with the protracted pandemic. Banks in Brazil have also taken prudent risk policies in approving loans to the segment, despite total loan origination to corporate clients, including SMEs, rising 14.1 percent year-on-year in April.

Brazil central bank to introduce new measures
Brazil’s central bank has revealed that it will implement a series of new measures with a potential value of more than $53 billion that are intended to increase smaller businesses’ access to loans and boost economic growth. A good portion of the 2 trillion reais from the previous government’s programmes implemented to help counteract the effect on the economy on the back of the crisis have been directed to bigger companies — and that needs to change. In fact, Brazil’s private-sector banks have been reluctant to boost lending amid the healthcare crisis. As a result many, SMEs are making no profits and many of them are recording huge losses.

The central bank won’t rest until necessary measures are introduced to keep credit flowing. It will buy corporate debt with a rating of BB- or higher, with a minimum maturity of 12 months to inject more cash into secondary markets. In addition, the bank will temporarily reduce capital requirements for Brazilian banks, freeing up cash that can be loaned to businesses and loosen the rules on using property as collateral for loans.

In June, it was reported that Brazil’s central bank could lower the benchmark Selic interest rate below a previously expected 2.25 percent to ease the impact of the pandemic on the economy. Interestingly, President of the Central Bank of Brazil Roberto Campos Neto said that the economy is anticipated to recover from the coronavirus crisis in the fourth quarter.

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