Why Brazilian firms face financing headwinds

Although Brazil's Q1 economic performance was better than expected, and 2023 GDP projections are being upwardly revised, the corporate sector nonetheless faces a challenging environment.

Bankruptcy filings by retailer Lojas Americanas and energy company Light earlier this year have led to tighter credit lines and financing across several sectors.

BNamericas talks in depth about this issue with Ricardo Carvalho, head of Fitch Ratings' corporate area.

BNamericas: What’s your assessment of the current financial conditions faced by companies in Brazil?

Carvalho: We have started the year very badly for companies. If we compare the 2022 scenario with the current one, we see a major difference.

For most of 2022, we were in a scenario of high liquidity with abundant credit lines for companies. This situation minimized the weak cash generation [problem] that existed because there was funding for companies.

This year we have seen negative corporate events like those with Lojas Americanas and Light. These were situations that made the scenario critical for companies and in the first quarter we saw that balance sheets were weak.

So, the combination of weak economic activity and high interest rates has hurt firms badly.

Due to this combination of factors, we had a higher number of company ratings downgrades in the first five months than in the entire years of 2022 and 2021 combined.

Whether the scenario improves will depend very much on the government's efforts and measures.

BNamericas: Isn't it strange that the scenario is difficult for companies given that GDP grew more than expected in the first quarter with upward revisions for this year by economists?

Carvalho: If we look at the details of the GDP result in the first quarter, we see that the positive result was greatly influenced by agribusiness.

If we evaluate the industrial sector, the numbers are very bad and the trend is likely to remain negative in the coming quarters.

BNamericas: Which segment has faced the biggest problems?

Carvalho: The biggest concern is with the retail sector where I see that there are companies that continue with liquidity problems, and I don't see significant improvements in the months ahead.

Cash generation remains poor and so are credit conditions for these companies.

BNamericas: Many economists expect the central bank to begin reducing the key interest rate, the Selic, in August. Could this somehow improve the scenario in the short term?

Carvalho: As much as the beginning of the Selic reduction is approaching, it will be very gradual. We’re not going to move from an interest rate of 13.75% to a rate of 10%. 

Possibly we will still have a year of high interest rates. This hurts companies and causes investments to be postponed or even revised.

But again, in this scenario, retail is the sector that I view with the main concern because it’s strongly linked to economic activity and dependent on working capital.

BNamericas: Which sectors are most protected at this juncture?

Carvalho: 2023 will be a good year for companies in the agricultural sector due to the super harvest.

Furthermore, Brazilian agribusiness is highly competitive on a global scale and has become increasingly sophisticated with mechanization.

Even with reduced commodity prices, export firms are also showing a good performance because they are companies that in recent years have had high cash generation, due to elevated prices and strong capital discipline.

BNamericas: Could progress on the tax reform front serve as an encouragement to companies?

Carvalho: Tax reform approvals, if they can show investors a scenario with more fiscal discipline and stability from the government, are always important even if the practical effects are not immediate.

When companies and investors perceive that there’s a better horizon, they see less risk in their investment decision-making. 

The government needs to look for positive factors that can generate positive expectations. Therefore, for example, it’s not considering changes to regulations that are working, such as the sanitation sector framework.