The effect of Covid-19 on the Brazilian productive sector has been severe with industrial production falling by 18. 8% in April after a record 9. 1% drop in March. In April, more than 860,000 jobs were lost and the number of jobless claims reached 960,000 in May, up 53% from last year.
This increase in unemployment occurred despite the fact that, as of the first week of June, more than 10 million civil servants had their contracts suspended or their salaries reduced under MP 936; This has compensated, at least temporarily, for the destruction of jobs.
Our estimates suggest that the effect is felt most weakly among micro and small enterprises (MSMEs) due to the type of economic activity they undertake, which involves face-to-face interaction (i. e. , retail, accommodation, tourism, and others). MSMEs are in dire need of equity financing during lockdown, as cash reserves may be temporarily depleted and companies will have to continue to meet their obligations as long as revenues do not materialize.
In fact, according to SEBRAE data, 89% of MSMEs experienced an average revenue drop of 60%, which is even more alarming when you consider that, according to our estimates, a giant portion of MSMEs – between 39% and 56% – are likely to have less than 21 days of cash reserves.
To protect viable businesses, avoid widespread layoffs, and thus maintain household incomes, the government and the Central Bank have put in place a physically powerful program for businesses and the money sector, adding liquidity measures, tax deferrals, and hard work measures to offset wages. and make contracts more flexible and reduce the regulatory burden. Access to those contracts will be critical to maintaining the survival of businesses and preserving jobs, as evidenced by the MP 936 wage subsidy program.
Although banks have a strong monetary position and the government has proposed a significant program, the increased credit risks resulting from defaults would likely deter long-term lending to MSMEs. The SEBRAE survey showed that only 14% of MSMEs that implemented loans were successful. .
The credit crisis would turn MSMEs’ liquidity disruptions into solvency problems, leading to more non-performing loans and widening the vulnerability of the money sector, thus creating a vicious circle in which pressures on the money sector can obstruct the sector’s genuine recovery. .
As the country is already implementing the partial reopening of the economy and now the focus is on the recovery phase, it is vital to assess which measures will want to be maintained for some time and which will need to be more specific to minimize their impact. fiscal cost. In the short term, new measures will be necessary to facilitate the adaptation of companies to mandatory fitness protocols (i. e. adaptation of spaces, educational staff, medical devices to ensure physical safety, etc. ).
Companies will want the design and implementation of these new emergency and fitness plans, which can be facilitated with the help of existing control extension bodies, such as SEBRAE or SENAI. The key to defining and implementing those policies will be the collection of real-time fitness data. and economic data, in order to monitor the scenario and act temporarily and as it should be in the face of possible relapses of the disease. This will be key to minimizing the economic prices of the pandemic.
It can also be a wonderful opportunity to push for government regulatory reform and reduce the excessive prices of doing business in Brazil. The implementation and acceleration of reforms to insolvency proceedings, the registration of companies and the coverage of minority investors are essential. We must guarantee the survival of successful companies, lower labor costs and promote the exit of companies and, above all, facilitate the access of new job-creating companies. Some countries are reworking the insolvency framework with transitional measures that can keep viable businesses running, rather than pushing them into premature liquidation.
The availability of financing will be a very important factor in accelerating economic recovery. Companies will want financing to make investments and repair current capital. It is imperative to ensure that the dangers to the stability of the monetary sector are contained. that macroprudential policies be strongly monitored and that the monetary safety net be strengthened, such as the Bank Resolution Law pending in Congress (PLP 281/2019).
As the threat of emerging credit is one of the key issues, countries are resorting to scaling up and adjusting partial public credit guarantee schemes, as well as leveraging generation responses to facilitate financing of the MSME chain.
In Brazil, beyond these measures, the implementation of open banking will herald power and a festival between banks and non-banks to further facilitate the financing of MSMEs. In addition, with limited guarantees to offer, MSMEs would benefit from reforms that facilitate registration. , trading and discounting of non-traditional collateral, such as “duplicates” and credit card receivables, as well as policies that offer partial government promises on those collateral.
MSMEs are among the most vulnerable economic agents and most affected by this pandemic. They account for around 60% of private jobs in the formal sector, excluding micro-entrepreneurs (in Portuguese, microentrepreneurs individuais/MEI), and can succeed in around 80% of private jobs in the formal sector. % when considered. There are also many vulnerable workers.
It is imperative to ensure that they have the mandatory funding and business support to overcome the pandemic. The current crisis is also an opportunity to promote the simplification of the business environment and companies to promote their digitalization in the wake of the pandemic.
This article was written in collaboration with Bujana Perolli, senior specialist in the financial sector, and Xavier Cirera, chief economist at the World Bank in Brazil.