Brazilian companies most indebted among 7 major emerging economies – BIS

RIO DE JANEIRO, BRAZIL – Even if a rise in insolvencies does not materialize, companies will face an increase in repayments as a result of the large growth in loans taken out at the start of the pandemic.

The Bank for International Settlements (BIS), a kind of central banks’ bank, estimates that Brazilian companies will have debts to repay over the next 2 years in an amount equivalent to 45% of their net profits. This is the highest percentage among the 7 large emerging economies examined.

In its annual report, BIS examines an alternative scenario on the global economy focused on the Covid-19 pandemic. It takes into account a situation in which vaccination campaigns would not progress, treatment would be lacking, and new, vaccine-resistant virus strains could emerge, leading to new lockdowns.

Countries with more limited policy space, particularly many emerging countries, would be hardest hit. In this scenario, corporate sector losses could increase and some banking systems would face pressure.

Based on the historical relationship between infection rates, lockdowns, and gross domestic product (GDP), BIS estimates that the emergence of a vaccine-resistant virus could shrink GDP by between 1.5% and 3.5% in the second half of this year. Regions where vaccination is most advanced would suffer the greatest impact on growth because of this setback.

Companies’ balance sheets have been more exposed since the start of the pandemic, with a substantial increase in loans, notably in the case of less profitable companies. Thus, the adverse effect of increasing bankruptcies would be magnified through their impact on banks and other financial institutions.

But BIS notes that even if an increase in insolvencies does not materialize, companies will face increased repayment due to the large increase in loans taken out at the start of the pandemic. The amount of domestic and foreign debt to be repaid over the next two years has increased significantly in many developed countries and several large emerging ones.

In some countries, this repayment exceeds 50% of companies’ net income. In Italy, in 3 to 5 years, debt repayment will be equivalent to 66% of companies’ profits. In France, it drops from 42.7% in 2 years to 7.6% between 3 and 5 years.

Among 7 large emerging countries (Brazil, China, India, Korea, South Africa, Turkey and Russia), Brazilian companies will have the highest increase in debt repayment over the next 2 years. Within the next 1-2 years, the amount of debt to be repaid will be equivalent to 45.42% of their net profit. This percentage drops to 12% in 3 to 5 years.

By comparison, China’s companies will pay 22.25% of their profit in up to 2 years, but between 3 and 5 years this will represent -17.6%, i.e., important financial relief. In India, in up to 2 years there would be no debt repayment (-10% in fact), but the bill rises to 16.3% of net profit between 3 and 5 years.

According to BIS, there are indications that a rebound from the Covid-19 pandemic could confirm the need for increased debt repayment by companies, “at least in countries where progress with vaccination is slow, delaying the relaxation of containment measures.”

If debts cannot be rescheduled, paying them will require companies to reduce costs or cut investments. Financial institutions under pressure and highly indebted companies will also delay reallocation of resources.

Overall, this scenario would be particularly more challenging for emerging countries, due to preexisting vulnerabilities and heightened risk aversion of international investors, according to BIS.

Source: Valor