RETHINKING FOGAPE
Evaluating Chile’s Partial Credit
Guarantee Scheme
Margarita Armenteros  Niccolò Artellini 
Andreas Ho...
Motivation
Description of Fogape
Evaluation
• Theoretical framework
• Regression discontinuity design (RDD)
analysis
Resul...
• SME sector in Chile contributes to 20% of
GDP
• Over 50% of workforce employed in SMEs
4/6/14 3
Source: World Bank
Motiv...
4/6/14 4
Source: World Bank Enterprise Surveys
(2010)
Constraints on Chilean Firms
• Founded in 1982 but re-launched in 2000
– Main goal  Guarantee loans of SMEs
• Initially endowed with $13 million
– Re-...
SMEs
Financial
Institutions
Fogape
4/6/14 6
Auctioning Off Guarantee Rights
• Short-term and long-term credit as well as
contingent credit
– 60% to working capital
– 40% to investment projects
• Max...
• Only enterprises with total annual sales less
than $750,000 in previous year
• Enterprises are non-eligible if:
– Existi...
• Lenders excluded if:
– Previous default rates considered excessively
high
– Less than 80% of the guarantee rights used
f...
• Loan recovery
– Timing of guarantee payouts
• Targeting of regions or sectors
• Coverage ratios
• Eligibility rules
4/6/...
• Longitudinal surveys from Ministry of Economy
• Panel of 2,650 enterprises from 2007 to 2009
– Formal enterprises with a...
• Quasi-experimental research approach
– Treatment depends discontinuously on
observable characteristic(s) of subjects
• I...
• Log Salesi,2009 – Log Salesi,2007
• Profit margin in 2009
• Debt-to-equity ratio in 2009
• Long-term debt over total deb...
• : constant
• Ti : dummy equaling 1 if firm i
eligible in 2007 and 0
otherwise
• Si,2006 : firm i’s 2006 sales
• S*: sal...
4/6/14 15
Validity Check
Results (I)
4/6/14 18
Results (I)
4/6/14 19
Results (I)Results (II)
4/6/14 20
Results (I)Results (III)
4/6/14 21
Results (I)Results (IV)
• As-if randomly assigned
• Measurement error in survey data
• Longer time horizon
• Data coincides with financial crisis
...
• Are firms really credit constrained?
• Are lenders substituting private for public
guarantees?
• Do enterprises really h...
• From 2000 to 2009, Fogape backed 250,000 loans
– Only 124,000 beneficiaries
• Larraín and Quiroz (2006) find that 87% of...
• #2 constraint for Chilean enterprises, according to
WB Enterprise Survey (2010), is:
– “Inadequately educated workforce”...
• More research into whether Fogape is truly
easing financial constraints on the right firms
• Review loan portfolio of pa...
• Coordinate Fogape with other SME targeting
programs
• Lenders should set up meeting of borrowers
at origination of loan ...
4/6/14 28
Improving
4/6/14 29
29
Legal Definition of
Firm Size in Chile
Annual Sales (Unidades de
Fomento)
Micro Less than 2,400 UF
Small From...
Rethinking Fogape: An Evaluation of Chile's Partial Credit Guarantee Scheme (Slides)
Rethinking Fogape: An Evaluation of Chile's Partial Credit Guarantee Scheme (Slides)
Rethinking Fogape: An Evaluation of Chile's Partial Credit Guarantee Scheme (Slides)
Rethinking Fogape: An Evaluation of Chile's Partial Credit Guarantee Scheme (Slides)
Rethinking Fogape: An Evaluation of Chile's Partial Credit Guarantee Scheme (Slides)
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Rethinking Fogape: An Evaluation of Chile's Partial Credit Guarantee Scheme (Slides)

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Barcelona GSE Master Project by Margarita Armenteros, Niccolò Artellini, Andreas Hoppe, Marco Urizar, and Bernard Yaros

Master Program: International Trade, Finance and Development

About Barcelona GSE master programs: http://j.mp/MastersBarcelonaGSE

Published in: Economy & Finance
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  • The fact that an “inadequately educated workforce” is no. 2 constraint is significant for us, because that’s what we’re recommending: refer Fogape-using firms to other public agencies that deal with expertise and technical training.
  • Make nice the combination of the graph and the bullet points.
    IMPORTANT TO MENTION: at first, it was mostly focused on micro firms, but from 2006 it began to put more emphasis on small firms (who actually receive a much larger fraction of the total loan amount given by Fogape). Also, mention how much it’s capital can be leveraged.
  • Mention how many banks participate and that Fogape is organized by BancoEstado
  • Mention maturities for short-term and long-term credit as well as interest rates. Say ON AVERAGE 60% and 40%. Also say how coverage ratio has changed over time.
  • Mention this yourself: “No exclusion by sector or years in business.”
  • The private financial institution has to follow all of the required compliance mechanisms and start the debt collection process. Only if the defaulter is still unable to repay their debt after 425 days, can the bank request the guarantee. Fogape authorities then have 15 days to deny or accept the reimbursement to the bank in question. SAY: Besides coverage ratio, these regulations also constrain the lenders’ moral hazard
  • Say in one sentence at the END that Fogape complies with many of these recommendations
  • Mention that questionnaires sent out randomly. And that firms of all sizes (maybe give percentages) and sectors PROBLEM: HERE you talk about 800 UF, next slide, threshold in dollars, we need to stick to one currency or say UF800 equivalent to around XX dollars.
  • Mention what our prior expectations are
    TALK WHY WE CHOOSE OUR CONTROLS HERE< OR SHOULD I EXPLAIN WHEN WE DO RESULTS??
  • Rethinking Fogape: An Evaluation of Chile's Partial Credit Guarantee Scheme (Slides)

    1. 1. RETHINKING FOGAPE Evaluating Chile’s Partial Credit Guarantee Scheme Margarita Armenteros  Niccolò Artellini  Andreas Hoppe  Marco Urizar  Bernard Yaros 4/6/14 1
    2. 2. Motivation Description of Fogape Evaluation • Theoretical framework • Regression discontinuity design (RDD) analysis Results Potential problems with Fogape Policy recommendations Appendix Table of Contents 4/6/14 2
    3. 3. • SME sector in Chile contributes to 20% of GDP • Over 50% of workforce employed in SMEs 4/6/14 3 Source: World Bank Motivation 8% 7% 7% 8% 8% 8% 8% 8% - 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 2005 2006 2007 2008 2009 2010 2011 2012 ChileanPesos(Millions) SME Outstanding loans- Commercial banks SME outstanding loans % GDP- Commercial banks
    4. 4. 4/6/14 4 Source: World Bank Enterprise Surveys (2010) Constraints on Chilean Firms
    5. 5. • Founded in 1982 but re-launched in 2000 – Main goal  Guarantee loans of SMEs • Initially endowed with $13 million – Re-capitalized twice in 2007 and 2009 by $10 million and $130 million respectively 4/6/14 5 0 10000 20000 30000 40000 50000 60000 70000 80000 0 10 20 30 40 50 60 70 80 90 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Thousands(UF) Thousands Total Number of Operations(left axis) Total Annual Amount of Guaranteed Financing (right axis)Source: Fogape Background of Fogape
    6. 6. SMEs Financial Institutions Fogape 4/6/14 6 Auctioning Off Guarantee Rights
    7. 7. • Short-term and long-term credit as well as contingent credit – 60% to working capital – 40% to investment projects • Maximum coverage rate is: – 80% for loans below $120,000 – 50% for loans above $120,000 • Previously issued loans not eligible 4/6/14 7 Eligibility of Loans
    8. 8. • Only enterprises with total annual sales less than $750,000 in previous year • Enterprises are non-eligible if: – Existing arrears in the financial system – Expected loss at time of loan issuance greater than 3% 4/6/14 8 Eligibility of SMEs
    9. 9. • Lenders excluded if: – Previous default rates considered excessively high – Less than 80% of the guarantee rights used from past auctions • If SME defaults, it is up to lender to recover loan • Fogape charges a commission of 1 to 2% of the credit to be guaranteed 4/6/14 9 Regulation of Lenders
    10. 10. • Loan recovery – Timing of guarantee payouts • Targeting of regions or sectors • Coverage ratios • Eligibility rules 4/6/14 10 4 Elements of Partial Credit Guarantee Schemes
    11. 11. • Longitudinal surveys from Ministry of Economy • Panel of 2,650 enterprises from 2007 to 2009 – Formal enterprises with annual sales over $35,000 • Over 500 variables – Firm-specific characteristics • Representation of surveyed firms by size: – Micro (12%); Small (33%); Medium (19%); & Large (34%) 4/6/14 11 Data Description
    12. 12. • Quasi-experimental research approach – Treatment depends discontinuously on observable characteristic(s) of subjects • Intent to treat, or effect of eligibility • Restriction of sample around eligibility threshold ($750,000) within bandwidths: – 75% & 50% of threshold sales value of eligibility 4/6/14 12 Regression Discontinuity Design (RDD) Analysis
    13. 13. • Log Salesi,2009 – Log Salesi,2007 • Profit margin in 2009 • Debt-to-equity ratio in 2009 • Long-term debt over total debt in 2009 4/6/14 13 Outcome Variables
    14. 14. • : constant • Ti : dummy equaling 1 if firm i eligible in 2007 and 0 otherwise • Si,2006 : firm i’s 2006 sales • S*: sales eligibility threshold of $750,000 • ( Si,2006 – S*): normalized support variable • f(): a polynomial function • Xi : vector of controls • r : fixed effects for r regions • c : fixed effects for c sectors • i : error term 4/6/14 14 yi =  + Ti + f( Si,2006 – S*) + f{(Si,2006 – S*)Ti} + Xi + r + c + i Specification
    15. 15. 4/6/14 15 Validity Check
    16. 16. Results (I) 4/6/14 18 Results (I)
    17. 17. 4/6/14 19 Results (I)Results (II)
    18. 18. 4/6/14 20 Results (I)Results (III)
    19. 19. 4/6/14 21 Results (I)Results (IV)
    20. 20. • As-if randomly assigned • Measurement error in survey data • Longer time horizon • Data coincides with financial crisis • Local treatment effect – Results say nothing about effect of eligibility on eligible micro-enterprises 4/6/14 22 Results (I)Caveats & Limitations
    21. 21. • Are firms really credit constrained? • Are lenders substituting private for public guarantees? • Do enterprises really have the expertise or productivity to undertake successful investments? 4/6/14 23 Results (I)Potential Problems Credit Constraints Fogape Loans Productive Investments Firm growth & profitability
    22. 22. • From 2000 to 2009, Fogape backed 250,000 loans – Only 124,000 beneficiaries • Larraín and Quiroz (2006) find that 87% of surveyed firms using Fogape after 2000 already had credit • Second Longitudinal Survey 2011: 4/6/14 24 Of 369 firms that reported using Fogape, what percentage obtained their biggest loan in 2009 using: Physical collateral 40% Private guarantee 18% Public guarantee 27% Casting Doubt on Credit Rationing Assumption
    23. 23. • #2 constraint for Chilean enterprises, according to WB Enterprise Survey (2010), is: – “Inadequately educated workforce” • Around 25% of small and 22% of medium firms identify inadequate labor force as main obstacle 4/6/14 25 Casting Doubt on Firm Productivity
    24. 24. • More research into whether Fogape is truly easing financial constraints on the right firms • Review loan portfolio of participating lenders 4/6/14 26 Policy Recommendation (I)
    25. 25. • Coordinate Fogape with other SME targeting programs • Lenders should set up meeting of borrowers at origination of loan with: – Technical Assistance Fund (FAT) – Technical Cooperation Services (SERCOTEC) – Export Promotion Program (PROCHILE) 4/6/14 27 Policy Recommendation (II)
    26. 26. 4/6/14 28 Improving
    27. 27. 4/6/14 29 29 Legal Definition of Firm Size in Chile Annual Sales (Unidades de Fomento) Micro Less than 2,400 UF Small From 2,400 to 25,000 UF Medium From 25,000 to 100,000 UF Large More than 100,000 UF Appendix
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