COVID-19 Report: Commission predicts major long-term impacts

ECLAC report: “Sectors and businesses facing COVID-19: emergency and reactivation.”
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Measures taken so far: Important but insufficient

The economic crisis generated by coronavirus disease (COVID-19) is having a major impact on the countries of Latin America and the Caribbean. According to the Economic Commission for Latin America and the Caribbean (ECLAC), the virus is hitting a productive and business structure with weaknesses that have been building up for decades.

“Before the pandemic, the region’s production structure already showed great structural heterogeneity that seriously limited its economic development possibilities,” says the ECLAC report, “Sectors and businesses facing COVID-19: emergency and reactivation.”

“The pandemic makes these weaknesses more evident and amplifies economic, social and environmental tensions” the report explains. “In the arena of production, it is urgent to mitigate capacity destruction, without neglecting the need for a sustained increase in productivity, the generation of productive linkages and increased learning and the generation and dissemination of innovations.

“In this context, manufacturing is of strategic importance and must play a leading role in the growth process and in changing the productive matrix. This requires policies to change the production structure. In other words, incentives other than those that currently prevail for private companies, together with the State, to make the necessary investments to diversify the economic structure, ensure a continuous and stable growth process and avoid social and environmental setbacks.

“To increase the availability of credit, 71 percent of the measures provide for a greater allocation of resources by the State, for example, credit lines or funds for guarantees, while nearly a third of them involve regulatory changes to inject more liquidity.”

The ECLAC report says, “Resources are generally provided by the public treasury and, in a few cases, by social security funds and loans from international institutions.

“Among the measures announced that do not require additional funds are the reduction of legal reserves, the reduction of interest rates for private financial institutions (banks, credit unions, savings banks, microfinance institutions) or the simplification of procedures and requirements for access to credit.

”The means used depend on the banking institutions of each country. Most of the countries have delivered loans directly through public institutions and public banks. Development banks have played a relevant role, among them Banco de la Nación Argentina; the Federal Economic Fund and the National Bank for Economic and Social Development (BNDES) in Brazil; the Banco Estado in Chile; Bancoldex in Colombia and Bank of the Ecuadorian Social Security Institute (BIESS). The use of public funds as guarantees for loans has been one of the most widespread practices.

“Overall, the amount encompassed by the credit measures announced in 19 countries represents 3.9 percent of the region’s 2019 GDP. Credit measures are the tool for which governments have provided the most resources, although the picture is uneven from one country to another. In most of them, the funds for credit-enhancing measures represent less than 4 percent of GDP of the Latin America and the Caribbean.

“Almost all countries have announced special lines of credit to finance the working capital of MSMEs to enable them to remain in operation and pay their workers’ wages. Many of these measures target the most affected sectors, such as tourism, or sectors that are strategic for food security, such as agriculture.

“The nature of the credits varies by country and the great majority are new schemes. Payment terms range from one to five years; in half of cases, deadlines are offered up to three years (deadlines were identified in 25 percent of the announced measures).

“Interest rates have been cut, subsidized in many cases, to as low as 0 percent in real terms; and grace periods vary between three and 12 months. For their part, the amounts requested are adjusted to the level of sales of each company, in some cases with predetermined caps. Some countries announced more favourable conditions for productive investment and established programmes made conditional upon companies retaining their workers.

“A second group of common measures seeks to provide liquidity to firms and avoid disrupting the flow of payments in the economy. Deferral of obligations to the State and to financial institutions were the most widely used tools in this category.

“In order to allow the rescheduling, restructuring and renegotiation of private loans, many countries modified banking regulations, with measures such as the admission of higher levels of debt and moratoriums, the maintenance of debtors’ risk classification, the increase of public guarantee terms, the disbursement of public resources for debt rescheduling and credit refinancing, and government-provided advice to companies for the renegotiation of loans.

“Among the conditions it was attempted to modify were opening costs, interest rates, payment terms and fee amounts. Micro- and small enterprises have been given preferential treatment.

“However, 86 percent of these measures have time horizons of less than 6 months, which, although it represents a significant financial effort (in Brazil, for example, the liquidity measures represent an amount equivalent to 3.1 percent of GDP, this will not be enough for the business sector to weather a recovery that will most likely be slow and gradual.

The report concludes, “Once the health crisis is over, companies will find themselves in a recessionary environment. Because sales of many businesses will likely to be slow to recover, the need for liquidity could be prolonged and the calling in of debts incurred during the health crisis could render their operations unviable. For this reason, the timing and mode of payment of loans and deferred obligations are crucial to firms’ staying in operation. The measures to provide liquidity and the mass extension of credit follow the logic of applying future profits to the present. This rationale is based on the assumption that there will be future profits with which to repay credits and deferred taxes. The current outlook does not support the assumption that a couple of years will be enough to generate the profit flow required to meet these commitments.”

The entire 20-page special report “Sectors and businesses facing COVID-19: emergency and reactivation” is ECLAC’s fourth in a series on the evolution and impacts of the COVID-19 pandemic in Latin America and the Caribbean. The report can be downloaded at:

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