Skip to Main Navigation
OPINION July 10, 2020

How to support MSMEs so they overcome the COVID-19 shock

The impact of Covid-19 in the Brazilian productive sector has been severe with a decline in industrial production of 18.8% in April after 9.1% decline in March, a record. In April, over 860 thousand jobs were lost, with unemployment benefit applications reaching 960 thousand in May - an increase of 53% compared to the previous year.

This rise in unemployment came despite that, up to the first week of June, over 10 million workers had their contract suspended or wages reduced under MP 936; which has offset the employment destruction at least temporarily.

Our estimates suggest that the impact is more hardly felt among the micro and small firms (MSMEs) due to the type of economic activity they conduct, which often involve face-to-face interaction (i.e. retail, accommodation, tourism, and others). MSMEs are in dire need of working capital financing during the lockdown as cash reserves can be quickly depleted, as firms need to continue meeting their obligations, while revenues do not materialize.

In fact, according to SEBRAE’s data, 89% of MSMEs showed an average fall of 60% on revenues, which is even more alarming considering that according to our estimates a large share of MSMEs - between 39%- 56%- are likely to have less than 21 days of cash reserves.

In order to protect viable firms, prevent widespread layoffs and thus preserve household income, the Government and the Central Bank have established a strong support package for firms and the financial sector, including liquidity support measures, deferrals on taxes, labor measures to compensate wages and make contracts more flexible, and to ease the regulatory burden. Access to these support measures will be critical to maintain firms’ survival and preserve jobs as the wage subsidy program under MP 936 is showing. 

Although banks have a solid financial position and the government has put forward a significant package of support, heightened credit risks as a result of non-payments may deter sustained lending to MSMEs. SEBRAE’s survey showed that only 14% of the MSMEs that sought credit were successful.

The credit crunch would then transform MSMEs’ liquidity issues into solvency problems, leading to additional nonperforming loans, and raising the vulnerability of the financial sector, thereby creating a vicious circle, in which financial sector pressures can hinder real sector recovery.

As the country is already implementing the partial re-opening of the economy and the focus shifts towards the recovery phase, it is important to assess which measures will need to continue in place for some time, and which ones will need to be further targeted to minimize their fiscal cost. In the short-run, new support measures will be required to facilitate the adaptation of business to the necessary health protocols (i.e. adapting spaces, training workers, medical equipment to guarantee health safety, and others).

Businesses will need the design and implementation of these new emergency and health plans, which can be facilitated with the support of existing management extension organizations such as SEBRAE or SENAI. Key to defining and implementing these policies will be the collection of real time data on health and the economy, to monitor the situation and act fast and with precision to potential disease relapses. This will be essential to minimize the economic costs of the pandemic.        

This can also be an excellent opportunity to accelerate government regulatory reform and reduce the excessive costs of doing business in Brazil. Implementing and accelerating reforms to improve insolvency procedures, firm registry and minority investor protection is critical to ensure the survival of profitable firms, easing labor costs and firm exit in an expedited way and, especially, facilitating entry of new firms creating new employment. Some countries are amending the insolvency framework with temporary measures that can facilitate the ongoing operations of viable firms, as opposed to prematurely pushing them into liquidation. 

The availability of finance will be a critical factor for the pace of economic recovery. Firms will need finance to both make investments and re-establish working capital. Thus, it is paramount to ensure that risks for financial sector stability are contained, that macroprudential policies are closely monitored, and that the financial safety net is strengthened, such as the bank resolution law pending in Congress (PLP 281/2019).

As rising credit risk is one of the key issues, countries are resorting into expanding and adjusting partial public credit guarantee schemes, as well as leveraging technology solutions for facilitating supply chain finance for MSMEs.

In Brazil, beyond these measures, the implementation of open banking will foster efficiency and competition between banks and nonbanks to better facilitate MSME finance. In addition, with limited collateral to offer, MSMEs would be served well by reforms that ease the registration, trading and discounting of nontraditional collateral, such as “duplicatas” and credit card receivables, and by policies that offer partial public guarantees for such collateral.

MSMEs are among the most vulnerable and hardest hit economic agents in this pandemic. They have around 60% of non-public employment in the formal sector, excluding micro entrepreneurs (in Portuguese, microemprendedores individuais / MEI), and could reach around 80% when they are considered. They are also supporting many vulnerable workers.

Ensuring that they benefit of the needed financing and business measures support to overcome the pandemic is key. The current crisis is also an opportunity to accelerate the simplification of the business environment and help firms accelerate digitalization as a result of the pandemic.   

This article was written in collaboration with Bujana Perolli, senior financial sector specialist and Xavier Cirera, senior economist of the World Bank in Brazil.