Record R$ 7 Billion Deficit for Brazilian State Companies

The deficit of state-owned companies in Brazil has reached an unprecedented level. From January to August, the total deficit amounted to R$ 7 billion ($1.25 billion).

Federal companies accounted for R$ 3 billion ($536 million) of this deficit, while state-owned enterprises contributed R$ 4 billion ($714 million).

These figures, reported by the Central Bank, reflect changes in company debt. This method differs from the Treasury’s approach, which measures cash flow.

The numbers have drawn attention because the Treasury ultimately guarantees public companies. Experts, however, see a silver lining in this deficit.

They point out that it stems from investments by federal companies and bond payments by state enterprises. These bonds are primarily linked to investments, especially in sanitation companies.

Alex Agostini, chief economist at Austin Ratings, believes the deficit would be concerning if it were driven by increased operating expenses. Instead, he notes that bond issuances, which become financial expenses when repaid, are the main factor.

João Pedro Leme, an economist at Tendincias Consultoria, shares this view. He explains that state-owned companies’ bond issuances undergo rigorous evaluation.

Financial Challenges of Brazilian State-Owned Companies

Rating agencies assess them, and they must pass through the Securities and Exchange Commission (CVM). Sanepar, the sanitation company of Paraná State, provides an example of such bond issuance.

Earlier this year, it issued R$ 600 million ($107 million) in bonds. These received an AAA rating, the highest possible, from Moody’s agency.

The Central Bank’s accounting method shows a deficit when financial expenses leave the company’s cash reserves. This statistic excludes public banks and Petrobras.

Experts believe that federal contributions to these companies between 2013 and 2023 influenced the aggregate number. For instance, in 2019, R$ 10 billion ($1.79 billion) was invested in state-owned companies.

The Naval Projects Management Company (Emgepron) received R$ 7.5 billion ($1.34 billion) that year. This funding was for constructing four Tamandaré-class frigates for the Brazilian Navy.

Another company that received significant funding was ENBpar. Created in 2021 after Eletrobras’s capitalization, it controls Brazil’s part in Itaipu Binacional and Eletronuclear.

ENBpar received R$ 4 billion ($714 million) in 2021 and R$ 1.2 billion ($214 million) in 2022. Despite these investments, some companies saw their deficits increase.

The Brazilian Post Office’s deficit rose from R$ 753 million ($134 million) to R$ 1.35 billion ($241 million) in the first half of 2024.

Infraero also reversed its position, moving from a surplus of R$ 459 million ($82 million) to a deficit of R$ 106 million ($19 million).

Under the current government, the Ministry of Management and Innovation has stopped publishing detailed reports on state-owned companies.

This change has reduced transparency and made analysis more challenging. However, economist Alexandre Manoel believes the data aligns with Treasury expectations.

Manoel concludes that for states, the deficit clearly results from privatization requirements in the sanitation sector. He sees no alternative unless one considers donating to these companies.