High interest rates in Brazil harm the financial health of companies, say experts

The current scenario of high interest rates and consequent restriction in the credit market has harmed the financial health of Brazilian companies, according to experts consulted by the CNN .

Despite the peculiarities that each case presents, some examples of companies that had to knock on the door of creditors in 2023 involve Americanas, Tok Stok, Marisa, Azul and CVC.

“Retail is one of the sectors of the economy that works with the lowest net margins, that is, it has to sell a lot to obtain a small percentage of profit, and with that the sector is always in need of capital injection”, explains Ulysses Reis, professor from Strong Business School.

It is also worth mentioning that Brazil has the highest real interest rates (which discount inflation) in the world, at 7.4%, second only to Argentina, a relevant challenge for business.

“Real interest at this level, with low inflation, which does not allow prices to be passed on, generated an explosion in the financial expenses of many companies, since the vast majority of large retail companies have leverage — they are financed with debt — and the cost of that debt last year exploded,” said Alberto Serretino, CEO of Varese Retail.

The number of company bankruptcies increased 56.5% in January this year, compared to the same month last year, according to a survey by Serasa Experian, from 46 to 72.

The increase reaches 80% when we consider the 40 bankruptcy filings filed in January 2021.

A change of scenery that permeates this movement of the last two years is linked to the Selic, the basic interest rate, which, in January 2021, was at its lowest historical level of 2% and, this year, hits around 14% per year , to 13.75%.

In the practical life of companies, high interest rates indicate the need to have more money to pay debts, often contracted in a scenario where the rate was close to the minimum, as it was in 2021.

In the case of Tok Stok and Marisa, traditional retailers of their branches in the country, for example, the companies even had difficulty in paying rents.

It is worth mentioning that, in these two cases, the financial situation of the companies was aggravated by the crisis in Americanas, which made the banks — which took billions of dollars from loans made to the company — more discerning in relation to other companies in the retail sector. But high interest rates are also at the heart of the problem.

This is because it is common for companies to need working capital to pay day-to-day bills, such as rent and suppliers.

bitter medicine

Interest rates are the tool used by the Central Bank to contain inflation.

Despite the side effects they may have on the economy, making credit more expensive and reducing the pace of activity in general, economists argue that it is a necessary remedy and a forced reduction in rates would have the opposite effect on prices.

In a recent interview with CNN, former finance minister Maílson da Nóbrega, founding partner of Tendência Consultoria, explains this unwanted effect.

“The perception (if the BC reduced interest rates “by force”) would be that the independence of the Central Bank ended.

Future interest would rise sharply, impacting the cost of the National Treasury and credit in the economy, and this would further slow down growth. Capital flight would provoke a sharp depreciation of the exchange rate, which would increase the acceleration of inflation. In other words, a complete and perfect disaster”, he says.