8. Chile
2020 was marked by coronavirus outbreak which impacted the economy and led to an unprecedented decrease of activity.
Despite advances in Chile’s economic recovery, GDP closed 2020 with an annual decline of 5.8%, but the growth projection for 2021 is raised to a range between 6.0% and 7.0%, while for 2022 it remains between 3.0% and 4.0%.
Since March 2020, Chile has developed a robust economic relief plan through the “Emergency Economic Plan”, which has 49 economic and social measures to support different people and firms. This Emergency Economic Plan, along with the 2020 “Step by Step Plan, Chile recovers”, seeks to gradually reactivate the economic activity through measures that encourage investment, infrastructure development, in addition to a special plan to simplify bureaucratic procedures, in order to promote and accelerate innovation and investment.
The foregoing, with a marked focus on the recovery of employment and the reactivation of micro, small and medium enterprises through tax measures, subsidy programs, financing and capacity development programs. In total, these plans mobilised resources that represent 9.7% of GDP.
According to the Central Bank, the supply of credit to SMEs is less restrictive and, with respect to the segment of large companies, there are no significant changes. However, the SME share of outstanding loans reached 21.4%, a historical peak, and the interest rate spread between large firms and SMEs fell from 4.0% in 2019 to 2.3% in 2020.
2020 marked an important step forward in terms of domestic financial schemes, presenting historic capital injections, strongly expanding the Small Business Guarantee Fund (or “FOGAPE” for short) by USD 3 billion, which aimed at expanding the financing coverage. Additionally, this fund will help to provide financing for enterprises with annual sales of up to USD 36 million, therefore increasing the current threshold which stands at around USD 12 million.
In terms of the guarantees granted by the Production Development Corporation (CORFO), such as COBEX, Pro Inversión and FOGAIN, there have been more than 62 000 guarantee operations, amounting to more than USD 2 billion.
In regard to non-bank finance, there have been actions undertaken to reduce the funding gap faced by micro-enterprises. In this sense, the “MSME Credit”, operated by CORFO, received a capital injection of USD 178 million and by the end of 2020 there were more than 54 000 credit operation via this scheme, amounting to USD 68 million.
With respect to venture capital funds, CORFO and Start-Up Chile’s programmes are the main instruments of SME capital financing, although other private and public initiatives have also developed. After two years of sustained increase in 2018 and 2019, 2020 marked a drop of 12% in venture capital investments, reaching an investment of CLP 54.9 in 2019 and CLP 48.3 in 2020.
In 2020, the Superintendence of Insolvency and Re-entrepreneurship (SUPERIR) implemented the Economic Insolvency Advisory program (AEI). This is a procedure by which an advisor is made available to smaller companies, free of charge, in order to propose improvement actions that allow them to overcome the state of insolvency, such as recovery agreements, search for new sources of financing, among others. During the period that the advisory lasts, the company has financial protection that suspends possible legal actions for a period of 90 days. The process was carried out first through the relocation of funds from Superir to Sercotec during 2020, with the objective of financing 498 AEI. By the end of 2020, a total of 321 AEI had been initiated.
Finally, the Commission for the Financial Market (CMF) is leading the proposal for a Fintech bill for the stock market. The Commission's preliminary draft seeks, among others, to provide a legal and regulatory framework for collective financing platforms and other Fintech activities related to the stock market. The preliminary draft proposal also incorporates an update of part of the current security market legislation in order to adapt it and preserve regulatory coherence between the new Fintech players and the players that operate today under the regulation and supervision of the CMF.
SMEs account for over 98.6% of all Chilean enterprises1. More specifically 75.5% of all enterprises are microenterprises, 20.2% are small enterprises and only 2.9% are medium-sized enterprises. Despite being few in number, large firms account for 86.9% of total sales, while MSMEs account for only 13.1%.
Data indicates that the share of debt held by SMEs to total outstanding debt increased since 2013 to 2017, with respective decreasing in 2018 and 2019. In 2020, the outstanding debt held by SMEs increased from CLP 20.80 in 2019 to CLP 23.90 billion in 2020.
Total outstanding loans have been permanently increased, marking a growth of around 10% in 2018, and 9% in 2019. 2020 represented a growth of 3%, accounting for a stock of CLP 111.8 billion of outstanding loans, with a SME share of 21.4%.
The stock of new business lending accounts in 2020 for CLP 70.8 billion, of which CLP 8.7 billion goes to SME lending, representing a share of 12.3%. On the other hand, short-term loans for SMEs increased by 12.6% in 2020. The increase in the stock of loans in 2020 is explained by the strengthening of the Small Business Guarantee Fund (FOGAPE) through the injection of USD 3 000 million, creating the FOGAPE COVID scheme. The measure has contributed to the delivery of more than 460 thousand credit operations to SMEs.
Figure 9.1 displays the distribution of financing sources used by SMEs in 2017, as self-reported by business owners in the Longitudinal Enterprise Survey (ELE). In comparison with the 2015 data, the main source of financing declared by businesses of different sizes is self-financing, contrary to what was reported in 2018, where banks dominated financial support. Likewise, sources of financing from the State and non-banking institutions also decreased compared to 2015.
Source: 6th National Institute of Statistics, Longitudinal Enterprise Survey 2019.
According to the Quarterly Survey of Banking Credit Conditions of the Central Bank of Chile in Q4 2020, credit conditions for both SMEs and large companies have remained relatively stable in recent years. Thus, for SMEs, according to 36% of the institutions, credit conditions remain limited, a portion slightly lower than that observed in the previous quarter (45%). Meanwhile, for large firms, the fraction of banks that report more restricted credit standards drops from 64% to 29% and that of those who indicate more flexible standards increases from 0 to 7%.
On the other hand, compared to third quarter, the supply of credit remains restrictive in the business segment, but in general the limitations stop deepening. Thus, for SMEs, credit conditions remain limited for 36% of institutions, a portion slightly lower than that observed in the previous quarter (45%).
Source: Central Bank of Chile, Survey of Banking Credit Conditions, 2021.
Interest rates for SMEs have decreased continuously since 2013 reaching 5.4% in 2020, compared 8.3% and 7.7% in 2018 and 2019, respectively. Such decline is explained by the FOGAPE guarantee scheme, as it established that the maximum rate to be granted for covered credit operations could not exceed the monetary policy rate by more than 3% nominal rate.
The SME share of outstanding loans got to 21.4%, an historical peak, and the interest rate spread between large firms and SMEs fell from 4.0% in 2019 to 2.3% in 2020.
According to the Fifth Longitudinal Enterprises Survey (2019), applications for loans to SMEs in 2017 reached 26.2%, which reflects a decrease with respect to 2015 (30%). This is a possible cause for the increase in self-financing mentioned previously. Similarly, the percentage of SMEs that have applied for and obtained a loan reached 23.4%, a decrease of two percentage points compared to 2015. On the other hand, the utilisation rate of these loans increased from 84.6% in 2015 to 89.3% in 2017.
Factoring and invoice discounting
The factoring market is built over three main players: The Banking Factoring Association (ACHEF A.G.), the Non-Banking Factoring Association (EFA A.G.) and The Chilean Commodities Exchange (Bolsa de Productos de Chile – BPCl). Nevertheless, the market is strongly concentrated on ACHEF and EFA, which respectively cover 72% and 11% of the total stock of factoring operations. It is estimated that SMEs account for 27% of all factoring stock operations and 75% of all clients.
More than 100 firms of this type provide financing to more than 20 thousand companies. Considering the effects of the pandemic in 2020, late payment and payment terms are increasing since 2019 which impacts factoring industry. After a sustained rise in industry’s stock, 2020 marks a drop from CLP 4.7 billion in 2019 to CLP 4.4 billion.
Leasing
Leasing services offered in Chile include real estate leasing, leasing on movable assets (machinery, vehicles, computing equipment, medical equipment, etc.), and leaseback services.
According to data from Chilean Association of Leasing Enterprises (ACHEL), leasing operations presented a slight permanent growth, with an average grow rate of 2.6% accounting for 2018, 2019 and 2020. However, stock in 2020 decreased from CLP 8.7 billion in 2019 to CLP 8.4 billion.
Fintech industry
Chile is part of the main Fintech ecosystems of the region, along with Brazil, Mexico and Colombia. The Fintech ecosystem in Chile has registered a total increase of almost 60% in number of firms in the last 19 months, from 112 in July 2019 to 179 in March 2021.
Innovations in Digital Payments and Remittances represent the largest Fintech segment in Chile, followed by companies dedicated to Business Finance Management (EFM). According to a survey From Finnovista Fintech Radar (2021), answered by 102 Fintech companies, the prevailing business model in the industry is B2B-based, since 68% of Chilean Fintech companies direct their solutions to various types of companies, among which unbanked and underbanked SMEs stand out, with a prevalence of 71% 5 and 76% respectively.
Likewise, it was found that the challenge for most companies in the sector (59%) is to scale their operations. One of the main results is that an ideal regulation could be a relevant factor to facilitate the development of certain business models, since 48% of the start-ups surveyed consider that there is currently no specific regulation for their business model and it is required.
On the regulatory side, the Commission for the Financial Market (CMF) is leading the proposal of a Fintech bill for the stock market. The Commission's preliminary draft seeks, among other matters, to provide a legal and regulatory framework for collective financing platforms and other Fintech activities related to the stock market. The preliminary draft proposal also incorporates an update of part of the current legislation in other matters of the CMF's securities market, in order to adapt it and preserve regulatory coherence between the new Fintech players and the players that operate today under the regulation and supervision of the CMF.
Payment delays
In relation to payment terms to SMEs, after increasing towards quarter 3 and 4 2019 due to social crisis, it is observed in 2020 that 90.9% of the amount of invoices is paid in 60 days or less in the fourth quarter of 2020. In addition, the most recurring payment term is between 0 and 30 days with 58.7% of the total amount (Bolsa de Productos, 2020).
Source: Bolsa de Productos de Chile - BPC, 2020.
SME bankruptcies
Law 20.720, enacted on October 2014, established a new reorganisation and liquidation regime for both corporations and natural persons. The law aims to facilitate firm reorganisations and debt restructurings and maintain companies’ productivity in the event of bankruptcies.
Following the promulgation of Law 20.720, the number of SMEs that have carried out a liquidation process has been increasing systematically until 2020, where the number of firms reporting bankruptcies where 368, same number presented during 2019.
In addition to the implementation of the Economic Insolvency Advisory program, the government proposed a new bill which is currently in the process of legislative discussion at Congress. The bill is in line with a structural reform process of the insolvency and re-entrepreneurship normative framework, in particular benefitting SMEs.
This bill includes a set of measures that are intended to: i) streamline and simplify bureaucratic aspects of current bankruptcy procedures; ii) create simplified procedures with rapid processing and low administration costs for individuals, micro and small businesses; iii) increase credit recovery rates promoting the restructuring of liabilities over the liquidation of assets, and v) provide legal certainty to companies that avail to these procedures. These measures translate into modifications to articles of general application of the law, adjustments to each of the existing bankruptcy procedures and the creation of two new simplified procedures: one of the liquidation for individuals and micro and small companies, and another for reorganization also for such segment of companies.
Non-performing loans
Total non-performing loans show a slight drop in 2020. Despite being at low levels in historical terms, they decreased from 25% in 2018 to 2.4% in 2019, closing 2020 with a share of 2.1% for all enterprises. On the other hand, for SMEs 2020 also marks a decrease, from 5.9% in 2019 to 4.7%.
In 2020, the Chilean government announced a series of measures aimed at generating economic relief for workers and micro, small and medium-sized companies in the light of the COVID-19 health crisis and the economic effects it has generated. A large part of the measures announced correspond to those contained in the “Emergency Economic Plan” I and II, announced on March 19 and April 8, respectively, which aims to support the liquidity and working capital of companies and workers and to which they add additional measures that are aimed mainly at boosting sales and job protection.
Along with the “Step by Step Plan, Chile recovers”, announced lately in 2020, the initiatives seek to gradually reactivate the economic activity through measures that encourage investment, infrastructure development, in addition to a special plan to simplify bureaucratic procedures, in order to promote and accelerate innovation and investment.
Both plans, the Emergency Economic Plan and the Step by Step Plan, are backed by the Transitory Emergency Fund (FET) from the Ministry of Finance. The Fund, created by Law 21.288 of 2020, of a maximum of USD 12 billion, aims to cover expenses and meet the needs derived from the health crisis. Specifically, they will be destined to the explicit objectives synthesized in the document "Framework of Understanding for an Emergency Plan for the Protection of Family Income and the Economic and Employment Reactivation".
Tax relief measures
In March 2020, tax measures are implemented to support individuals and SMEs. These include the postponement of VAT payment for 3 months for all companies with sales of less than UF 350 000, making it possible to pay them in 6 or 12 monthly installments at zero real interest rate, depending on their size.
Additionally, the package of measures included:
a. Suspension of the monthly provisional payments (PPM) of the corporate income tax for the next 3 months;
b. Anticipation of the return of income tax that corresponds to SMEs;
c. Postponement until July 2020 of the payment of income tax for SMEs;
d. Postponement of the payment of April contributions for companies with sales of less than UF 350 000 and for people with properties with a tax assessment of less than CLP 133 million;
e. Temporary release from April of the stamp and stamp tax at 0% for all credit operations during 6 months;
f. Relief measures for the treatment of tax debts with the General Treasury of the Republic (TGR) focused on SMEs and people with lower incomes.
Accordingly, Law 21.256 was passed, and it establishes tax measures that are part of the Emergency Economic Plan and labor reactivation within a framework of medium-term tax convergence.
The text also included two aspects that were the result of numerous conversations between parliamentarians, the Executive and SME organizations: an SME working table in order to evaluate and propose measures for the sector, under the institutional framework of Law 20.416 and at eaves of the Ministries of Finance and Economy. As well as benefits in support of the passenger transport sector (taxi drivers, bus drivers and carriers), with the delivery of a CLP 350 thousand bond and an emergency loan with a 0% rate.
Credit guarantees
State-backed credit guarantees are provided by Banco Estado, through the Small Business Guarantee Fund (FOGAPE), FOGAIN (a credit guarantee scheme for loan obligations, investments and working capital) operated by CORFO, COBEX, Proinversión and the Mutual Guarantee Societies Schemes (IGR). Under the IGR programme, CORFO provides funding to the reciprocal guarantee societies, which in turn provide guarantees to SMEs.
On April 24, 2020, Law 21,229 was published, which increases the capital of the Guarantee Fund for Small and Medium-sized Entrepreneurs (FOGAPE) and temporarily makes its requirements more flexible. The objective of the bill is to expand the benefits and uses of FOGAPE and help companies to overcome the pandemic and reactivate through state-guaranteed credits, which can now be used for investment and payment of current debts, as well as capital of work.
Through this Law, FOGAPE was strongly expanded, injecting up to USD 3 billion and temporarily flexing its requirements, until April 30, 2021. FOGAPE was authorized to provide loan guarantees for companies with annual sales of up to UF 1 million. The maximum amounts that can be guaranteed have been increased. The maximum interest rate for financing was limited to 3% plus the MPR (currently 0.5%).
a. Almost 275.000 loans with State guarantee have been granted, an amount that exceeds USD 11 billion.
b. This is especially important considering that 97% of all loans are granted to small and medium enterprises.
By December 2020, a bill called for a new FOGAPE initiative. The new FOGAPE-REACTIVA program, passed in early 2021 (Law 21.307), allows to increase the limits of the FOGAPE guarantees for economic sectors that have been most affected by the current crisis, such as tourism, hotels and gastronomy and when the credit is used for the acquisition of fixed assets.
Similarly, CORFO runs the FOGAIN, COBEX and Proinversión credit guarantee programmes to provide funding for working capital and investments. FOGAIN provides coverage for loans that finance short and midterm projects, or for factoring or leasing endeavours. COBEX provides coverage for foreign trade credit operations. Finally, Pro-Inversion insures credit and leasing operations that require large amounts of money and mature over longer terms (more than 36 months).2
Source: CORFO and FOGAPE, 2020.
Regarding the flow of loans in 2020, from January 1, 2020 to December 31, 2020, the CORFO Guarantee Programs benefited 25,986 companies, reflecting a decrease of -32.9% compared to the same period of 2019, granting 31,480 operations with CORFO Guarantees for CLP 1,089,560 million, 79.0% of the guarantees were placed in micro and small companies (CORFO, 2020).
In the stock of loans as of December 31, 2020, the CORFO Guarantee Programs benefit 96,212 companies, with 122,141 operations, with an outstanding loan amount of USD 3,021 million (CLP 2,304,646 million). Compared to December 31, 2019, the stock of beneficiaries and operations decreased by -16.6% and -19.0% respectively. In the same way, the current credit balance in -14.1%.
In addition, according to the Public Report of Mutual Guarantee Institutions (CORFO, 2020), currently there are 8 Reciprocal Guarantee Companies operating in the IGR I - IGR II - IGR III - IGR Programs Coverage. According to figures as of December 2020, the total flow of surety certificates issued reaches close to MMUS CLP 4,104, a situation that has meant supporting operations of more than 37 thousand beneficiaries.
Regarding CORFO MSME Credit, during the first semester of 2020, adjustments were made to the program regulations aimed at enhancing its use, creating modalities that better adapt to the needs of the beneficiary companies and responding to the greater difficulties of access to financing due to the emergency caused by COVID-19 and its effects on the credit market.
The adjustments that were carried out are of a permanent and transitory nature. On the side of permanent adjustments, among others, a new modality of Rotating Credit Line was created and the requirements for Non-Banking Financial Institutions (NBFIs) wishing to operate in the special agricultural and indigenous modalities were made more flexible, with the aim of promoting this type of intermediaries.
On the other hand, the transitory adjustments will be in force until December 31, 2021 and will allow the IFNBs to provide financing to large companies (with sales exceeding UF100 000 and up to UF200 000) and to finance the same RUT up to UF10. 000 (usually up to UF2 500). To implement these changes, the 2020 Program budget was increased by USD 150 million.
Equity financing policies
CORFO develops and manages promotion programs for the venture capital industry, offering long-term financing to Investment Funds governed by the provisions of Law No. 20,712 on the administration of third-party funds and individual portfolios and by Supreme Decree No. 129 of the Ministry of Finance of the year 2014, in a type of credit line and with the purpose that these are invested in small and medium-sized Chilean companies with ventures that present high growth potential, and that require the support of a strategic partner to be actively involved in management in order to accelerate its development and growth process.
In summary, from 1998 to December 2020, CORFO has opened 64 lines of credit to investment funds, committing resources for USD 932 million. USD 612 million have been disbursed, and USD 227 million remain to be disbursed. There are currently 48 lines of credit in force, and 16 lines are closed.
From 1998 to 2020, USD 917 million have been invested in 374 beneficiary companies. It should be noted that of this amount, USD 692 million were invested in companies that, at the time of the first investment, were micro or small companies. During 2020, USD 62.1 million were invested and 36 new companies were supported through CORFO's Venture Capital Programs.
In summary, key updates made during 2020 include:
An update of the risk capital programs was carried out, tending to increase the supply of investment funds by attracting administrators and funds with an international horizon, in turn, the sales limit of the companies eligible for the Ministry of finance’s Transitory Emergency Fund program was also increased to UF10 000.
Between January and December 2020, CORFO made disbursements to investment funds for an amount of USD 43 million (UF 1,192,770), in the same period of 2019 disbursements totalled USD 54 million (UF 1,372,505), which represents a 13% drop (calculated on disbursements in UF for the period).
Regarding the number of new beneficiary companies, as of December 2020, 36 companies were supported, which represents a decrease of 5% compared to the same period of the previous year.
In total, 48 companies were supported by CORFO's Venture Capital programs as of December 2020 (new companies and follow-on investments), which represents an increase of 37% compared to the same period of the previous year.
The pandemic has strongly affected various areas of our economy, although the results of the first semester seemed promising, during the second semester a deterioration in the requests for disbursement of funds could be observed.
Source: See Table 8.3.
References
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