their guarantees to the equivalent of 7.4 and 4.5 percent of GDP, did so in the context of larger and comprehensive COVID-response packages, which had PCGs at the center of the fiscal effort to support demand.<sup>33</sup> In that sense, their strategy had similarities with their advanced country counterparts, which benefited from a degree of fiscal space that is not available to most countries in LAC.

Despite access to finance of SMEs being a significant problem in most of the countries in the region, PCG schemes are still too small to be on the radar screen of the financial sector and hence be impactful. Prior to the unfolding of the pandemic, only three countries in the region (Mexico, Colombia and Chile) had PCG schemes that covered more than 10 percent of the local banking system’s SME lending portfolio. The large fiscal stimulus implemented by the Peruvian government to fight the pandemic made COFIDE a relevant player in the local SME credit market. However, most PCGs in LAC remain relatively small. This raises questions regarding their ability to provide additionality. In concrete terms, banks will only build platforms for serving the SME sector to the extent that they see growth opportunities in it. Insufficient efforts could lead to the PCGs merely providing a vehicle for risk-sharing, with little impact on the selection of SMEs receiving credit.

The focus of PCGs in LAC during the pandemic was largely set on increasing the coverage ratio, while other parameters, including procedures for executing the guarantee, program extension, grace period or maturity, have been less exploited. The schemes in the region can benefit from the experience of advanced economies and in particular European countries, as these countries used, adapted, and expanded their public PCG programs during the COVID-19 market swing to support both SMEs as well as large enterprises. Going forward, the experience of advanced economies may also provide a roadmap for developing countries, as the focus of their schemes transitions back to the promotion of access to finance among SMEs.

The pricing of the guarantees, in most of the PCG schemes, does not seem to reflect the risk of the portfolios. The implementation of a risk surveillance framework would enable the schemes to price-byrisk and bring transparency about the subsidies that they are providing. The surveys point to evidence of subsidies embedded in the fees charged to intermediaries. The provision of fiscal support is not necessarily a negative feature of a scheme, and in fact it can be very appropriate in circumstances such as the current pandemic. Nonetheless, best practices recommend that PCGs should adopt a transparent and consistent risk-based pricing policy to ensure that the schemes are financially sustainable, and that any reliance on explicit and implicit subsidies should be transparent and publicly disclosed. The development of transparent policies on risk management and pricing would represent major steps towards the preservation of long-term sustainability of PCG schemes.

Most PCG schemes in the region measure solvency according to leverage. The latter is a handy proxy for the PCGs’ capitalization levels, though it has limitations. Moreover, PCGs in the region tend to use their statutory maximum leverage as a guide for their operations, but there is no generally accepted criterion for these legal limits, which exhibit a high variance across the region. PCGs in LAC should move towards the use of standard solvency metrics, including the use of risk-based measures. Currently, PCGs are not adequately monitoring the risk that they are taking, relying mostly on leverage indicators. Following the

> 33 FCI GP COVID-19 Financial Policy Response Compendium.

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