Investing in Brazil’s “real economy” has become more expensive. And the return, smaller

Investing in Brazil’s “real economy” became more expensive and the return on this investment decreased, in an environment of higher interest rates and less heated demand. This is what a survey by the Center for Capital Market Studies at the Economic Research Institute Foundation (Cemec-Fipe) indicates, based on data from companies listed on the B3, the Brazilian stock exchange, with the exception of Petrobras, Eletrobras and Vale.

According to the survey, the cost of capital (that is, to raise funds) increased from 11% to 12% per year between 2021 and 2022, while the return on invested money dropped from 16.3% to 13%.

Cemec has not yet finalized the data for the first quarter of 2023, but the persistence of high interest rates suggests that this scenario has not improved. The basic rate (Selic) has been at 13.75% per annum since August and should not fall anytime soon, according to Central Bank signals. Houses like XP Investimentos and Bradesco do not expect cuts in the Selic before September.

The data show the difficulty faced even by large companies – as is the case with most of those listed on the stock exchange – in raising funds. These companies can appeal to external sources of financing, have better access to the capital market and have economies of scale. For small and medium-sized businesses, which generally do not enjoy these advantages, the scenario is even more delicate.

According to the Central Bank, the average interest rate charged to companies – of all sizes, in all types of credit – jumped from 12.3% per year in March 2021 to 21.5% per year in March 2023. In the same period, the “spread” – the difference between the bank’s funding cost and the interest it charges the customer – increased from 6.8 percentage points to 9.7 percentage points, on average.

The Cemec-Fipe coordinator, Carlos Antônio Rocca, says that one of the factors that raised the spread was the increase in defaults. In credit for companies, it rose from 1.2% to 2.1% of the portfolio in the last two years.

One of the segments that was most indebted was retail, which during the pandemic had to make a rapid transition of its business model and felt a squeeze on profit margins. Merchants, in addition, suffered from the increase in delays on the part of consumers – between the months of March 2021 and 2023, defaults by individuals increased from 2.9% to 4.1%.

Data from Serasa Experian show that 6.5 million companies had overdue debts in March. It is the highest number in the historical series, which began in March 2016. Among consumers, 70.7 million had credit restrictions, another record.

Expectations are not favorable in the short term. “Delinquency is a chain event. While most consumers are unable to settle, it will be very difficult for entrepreneurs to improve. With interest rates still high, inflation high and many people negative, purchasing power has no incentive and, therefore, the cash flow from projects continues to slow down, making it difficult to settle debts”, says Luiz Rabi, an economist at Serasa.

Rocca, from Cemec-Fipe, points out that the cost of credit has increased in lines that are widely used by companies, such as working capital and discounting bills. The phenomenon is not restricted to the banking market. Bond issues, such as debentures, are costing more.

Noise of a political nature also influences the cost of money by increasing uncertainty. At first, the market was affected by the presidential elections. Afterwards, the “ceiling-breaking” PEC raised concerns about public accounts, especially with the trend towards an increase in government spending, which was reflected in an increase in future interest rates – which influence the cost of long-term credit.

The various measures taken by the government of Luiz Inácio Lula da Silva to increase tax collection, generally directed at companies, do not help either. report by People’s Gazette showed that, in just the first four months of the current administration, the Executive announced 12 initiatives to increase revenues.

“This generates an environment of increased cost of capital, especially in the long term. A more consistent fiscal policy is needed to avoid an uncontrolled process of increase in interest rates”, says Rocca.

Monetary tightening, elections and the external scenario worsened the performance of companies in 2022

A study by TC Economática with 170 B3 companies found that, although the median net revenue increased 16% last year, the median operating result measured by Ebitda rose only 2%. “These are effects of a monetary tightening, marked by the rapid rise of the Selic rate and a more critical consumer in the face of this scenario”, justifies the chief analyst at TC, Carlos André Vieira.

Other factors that worsened the companies’ performance, according to equity strategist Jennie Li, from XP Investimentos, were political uncertainty in Brazil, caused by the electoral process, and the international situation, marked by accelerating inflation, rising interest rates and the threat of recession.

Analyzing the companies that are part of the Ibovespa, the brokerage points out that 44% of them had a better than expected operating performance in 2022, the worst result in seven quarters. Another 47% had results below expectations and 9% within expectations.

With so many adverse events, 2022 ended up being a kind of hangover from 2021 – which, in the words of Rocca, from Cemec-Fipe, was “perhaps the best for publicly traded companies since 2010”.

In 2021, interest charged to companies was still relatively low – among the lowest in the Central Bank’s historical series (started in 2011), higher only than those charged in 2020.

Economic activity, meanwhile, was in a clear recovery with the reopening after the worst moments of the Covid-19 pandemic. That year, GDP grew by 5%, more than offsetting the 3.3% retraction of 2020.

Disorganization of production chains and increased demand raised inflation and interest rates

The issue is that the pandemic left behind a profound disorganization of production chains, which were unable to meet demand at the time of reopening. This has led to a sharp increase in costs for companies around the world.

Here in Brazil, for 12 straight months – between February 2021 and January 2022 – the Producer Price Index (IPP) calculated by the IBGE, which reflects industrial costs, hovered above 25% per year.

Part of the increase in the cost of companies was passed on to consumers, not least because demand increased thanks to measures to combat the pandemic, such as emergency aid and the extraordinary withdrawal of the FGTS.

A new source of pressure came from the invasion of Ukraine by Russia, in February 2022. Agricultural and energy commodities, such as oil, which at one time cost US$ 140 per barrel, contributed to further pressure on prices. For ten months, between September 2021 and July 2022, consumer inflation hovered above 10% as measured by the IPCA.

The increase in price indices led to higher wage adjustments. According to Fipe, in March, the median readjustment was 6%, 0.5 percentage points above the accumulated inflation in one year, as measured by the INPC. In the previous 12 months, two-thirds of 19,100 wage negotiations resulted in real gains for workers. “This whole picture contributed to erode the companies’ gross profit and margins”, says Rocca.

With inflation on the rise, the Central Bank entered the field to try to cool down the economy. The climb in the basic interest rate began in March 2021 and continued until August 2022, a period in which the Selic jumped from 2% to 13.75% per annum. It is at that level so far, and there are no signs that it will go down in the short term.

Confidence in Small Industry Is Lowest in Nearly Three Years

Deteriorating financial conditions and the slowdown of the economy hit small businesses hard. A survey released in early May by the National Confederation of Industry (CNI) shows that small industrialist confidence is at its lowest level since July 2020.

Sales were good in the first quarter of the year, with results above the historical average. The problem is in the financial situation of the companies, with worse conditions in the operating profit margin and access to credit.

In the first quarter of 2023, small businessmen listed the high tax burden as the main problem in the extractive and manufacturing industry. In construction, meanwhile, the biggest obstacle is high interest rates, a problem that has gained relevance in recent quarters.

Another issue that has also been making the situation of small industries more difficult is insufficient demand. “This item gains relevance as economic activity shows signs of deceleration and is related to the issue of high interest rates”, highlights the CNI.