Mexico's credit guarantee programs: Shifting regional impacts

Abstract

Rationing of working capital in rural businesses that work in agriculture is preventing from improving living conditions in impoverished areas. Whereas government programs have their greatest impact in areas attempting to transition from subsistence production into a modern commodity production system, the attempts to achieve social goals produce varying regional impacts and do not necessarily reach the agricultural households most in need. As a response, Mexican government has established public programs that back small rural enterprises when doing financial operations with private entities. It is well documented that small rural businesses suffer from commercial credit rationing due to inherent risks of their economic activities. Lack of collaterals, credit history or formal accounting records are some of the factors that the private banks avoid credit operations with this kind of producers. Mexican government has established a set of public programs to promote rural economic development through credit guarantees. These guarantees reduce the counterpart risk in credit operations making rural businesses more attractive to private banks. However, the eligibility conditions of this credit guarantee schemes (CGS) can discriminate and leave out the most poor. Adjustments to such programs have been implemented to provide focalized support to the poorest regions of the country. A new set of eligibility rules were issued in 2008 through a new program called Fondo Nacional de Garantías or FONAGA. Even though there is an increase in the number guaranteed operations after the inception of FONAGA, the spatial distribution of the CGS has not been evaluated. Calculating a Gini coefficient as a measure of inequality between the income coming from guaranteed credits and the population with the most patri(cold spots) and hot spots appeared in the northwest region in 2006. In 2008, the year when FONAGA started operations, the patterns changed significantly. Operations moved from northern to western and southeastern municipalities. In 2009 and 2010 a high number of guaranteed operations increased the allocation intensity in the municipalities of the states of Quintana Roo, Campeche and Yucatan. In general, the hot spots shifted from the north to southern regions in the 2008-2013 period. A combination of a high number of operations with high credit coverage amounts in the southeast region is associated to a downward shift of the average amount CGS per operation, meaning that small-scale farmers in greater need were included in the guarantee schemes after FONAGA took place primarily in the states of Campeche, Yucatan, Quintana Roo, and Chiapas. Until now this type of analysis has not been used to evaluate the targeting of CGS operations. Its application provides a different and important perspective regarding CGS performance. A shift in the CGS allocation after the introduction of FEGA in 2008 represents a success from the view point of the trust administrator. However, clustering patterns are evidence of a continuing uneven distribution of the credit guarantees. This points to the need of more analysis for public programs implementation to explore additional ways to provide financial access to rural businesses that do not have private funding.