Insolvencies could skyrocket 47% in Brazil in 2021, says Allianz Group

RIO DE JANEIRO, BRAZIL – Company insolvency could skyrocket 47% in Brazil this year, due to the withdrawal of government support measures amid the devastating effects of the health crisis on several sectors.

Insolvency in Brazilian export destinations may also increase by 17% this year. The projections come from Euler Hermes, credit insurer of the Allianz Group.

Last year, despite the pandemic, insolvencies fell by 15% in the country due to government support and court closures, thus the figure may not accurately reflect companies’ financial situation.

Between 2016 and 2019, the number of insolvencies in Brazil averaged 2,800. After the drop in 2020, Euler Hermes projects that the figure could reach or exceed the 3,000 mark this year.

The arguments pointing to more insolvencies include cycles of activity shutdowns and restarts in the first quarter and the end of government support measures in 2021.

Moreover, the pressure of raw material prices has increased. Credit costs are expected to rise with the normalization of monetary policy.

Political risks, such as President Bolsonaro’s interventionism in Petrobras, may exacerbate financial tension in Brazil, which has impacts on the exchange rate, on companies’ costs and profitability, according to Euler Hermes.

For the insurer, a potential government support package, which is not on the agenda at this time, could defer the wave of insolvencies to 2022 in Brazil.

In addition to more insolvencies, the prospects for investments in the country are considered bleak. Higher import prices, with a weaker real against the dollar, generally “go hand in hand with low investments,” notes Euler Hermes.

As a result of inflationary pressures, the firm expects the Central Bank to raise interest rates for the first time since 2015. This may help contain inflation, but it will increase loan costs and could stifle a recovery, the insurer says.

The company points to the country’s limited availability of covid-19 vaccine doses as one of the risks, but believes an improvement in hospitalization figures could be observed in April.

And it alerts to a “high political and social risk” due to unemployment and the end or reduction of emergency aid. Euler Hermes estimates that the “real” unemployment rate in the country stands at 22%, if the 10 million people outside the labor market are considered. The official rate stood at 13.9% in the most recent survey.

Social risk and economic uncertainty will shape 2021 and 2022 in Brazil, according to the insurer. In Latin America, it points to uneven shocks and diverging paths. A rebound may be more dynamic in Colombia, Uruguay, Chile, and Peru. Mexico and Argentina will lag behind.

Globally, the projection is for recession to continue in this first quarter in regions where the health situation has worsened (Europe, Latin America). It reiterates that a slower emergence from the health crisis pressures for more monetary and fiscal support.

Source: Valor