Short-term boost, but imbalances weigh on growth outlook in the medium-term



  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD2055.506bn (World ranking 8, World Bank 2017)
Population 209.29mn (World ranking 5, World Bank 2017)
Form of state Federal Republic
Head of government Jair Bolsonaro (President, far-right) since January 2019
Next elections 2022, presidential and legislative
  • Important role on an international and regional scale
  • Diversified economy
  • Growing middle class
  • Robust foreign direct investment inflows, high level of foreign exchange reserves and low external debt
  • Support for IFIs likely if needed
  • Vulnerable to global commodity prices
  • High production costs
  • High taxation and red tape
  • Persistent inflation (although declining) and large fiscal deficits
  • Political and social tensions, corruption and income inequality

Cyclical decline in insolvencies, but corporates are not home and dry yet

We expect a -6% decrease in company insolvencies in 2019 in Brazil.

The cyclical recovery and lower cost pressures should benefit companies in 2019

On the cost side: the temporary spike is behind us. First, (i) wage pressures should remain limited; nominal wages are barely growing. There is indeed still slack in the economy, with unemployment at 11.6%. Second, (ii) the input price shock in 2018 with the combined effect of higher oil prices and the truckers’ strike is now fading. We do not see oil prices soaring (USD69/bbl on average for Brent in 2019) and we expect the producer price index to continue on its decelerating trend (+7.9% y/y in January down from +13.9% in October) while inflation stays muted (+3.8% in December). Finally (iii) financing cost are decreasing as lending rates are at a four-year low for corporates. The 10-year sovereign rate is at a historical low (8.7% against highs of 12.5% last year), helping to push down corporate borrowing costs. The policy interest rate is also at a record low (6.5%) and the central bank is not expected to tighten its monetary policy this year.

On the revenues and activity side: we see a gradual acceleration. In 2019, real GDP growth should accelerate from +1.3% in 2018 to +2.3% in 2019. In addition, credit growth for non-financial corporations is back to positive territory after contracting for close to 3 years.

Yet fundamentals are not so rosy for corporates, despite the post-election confidence boost

Doubts remain on the sustainability of such decline in insolvencies, as risks remain. The sector risk picture has improved since Q4 2017, as Euler Hermes has recorded 8 sector risk upgrades and 0 downgrade. Yet Brazil’s industry risk remains relatively high: 11 out of 18 Brazilian sectors are still rated sensitive risk compared to ~4 out of 18 sector in country on average in the world. And no sector is rated “”low risk” compared to ~2 out 18 of sectors in Latin American countries on average.

Lastly, the economy has still not fully recovered from its worst recession in history. Besides, the level of company capacity utilization, at 74.3 in January, was still 7 points below its long-term average.

In conclusion, while companies should start reaping the sows of the cyclical economic recovery, it will take much needed reforms to improve the business environment and overhaul the social security system to durably restore confidence; this would help put insolvencies back in a sustainable decreasing trend. Yet we continue to believe that the reform outlook is challenging, given governability issues and potential instability of the new president’s policy platform. Watered-down reforms or political gridlock would end Bolsonaro’s honeymoon and could trigger market volatility; it could lead to an increase in Brazil’s risk premium, hence rising corporate borrowing costs.

Renewed political instability weighs on the implementation of the reform agenda

As the economy begins to emerge from the recession, the government continues to push for ambitious reforms. Last on the agenda, the pension system reform should set a minimum retirement age of 65 for men and 62 for women and reduce pension benefits. Currently, Brazilians retire at 54 on average with almost full benefits. Reforming one of the most generous systems in the world seems essential to alleviate the pressure on public finances. The government also aims to reform the bankruptcy law to help indebted firms emerge faster from creditor protection. The aim is to reduce the average length of bankruptcy protection to 2 years, against 7-8 years currently, and to help companies under creditor protection to maintain operations and borrow funds.

Moderate external risk as conditions improve

A strong upturn in Brazilian exports is visible since the beginning of the year. In 2017, growth of exports over 12 months turned positive for the first time since August 2014 and the April figure (+4.6% y/y) was the highest since July 2012. In levels, exports are 8% higher than the last recession low but still 19% lower than the last peak. This trend is expected to continue on the back of: (i) positive crops’ forecasts and, notably, plentiful soy and corn harvests; (ii) rising commodity prices; and (iii) recovering global trade, with exports to China and the US leading the way.

Imports have recovered as well, but not as fast as exports. Hence, driven by a rapidly improving balance of goods, the current account deficit narrowed significantly from -3.3% of GDP in 2015 to -1.3% in 2016. It should remain stable at -1.5% in 2017. FDI flows comfortably cover 103% of the external deficit and have proven resilient. Yet portfolio investments have proven much more sensitive to cyclical downturns. These plummeted in 2015 and turned negative in 2016 (reaching -USD20bn outflows in last November). Although they have stabilized since the beginning of the year, further volatility cannot be ruled out on the back of a new wave of political turmoil.

Brazil’s vulnerability to capital swings is mitigated by ample foreign exchange reserves covering more than 20 months of imports. Moreover, external debt-to-GDP ratio is low (19% in 2016) and projected to remain at this level.  

Poor business environment

Brazil ranks 123rd out of 190 countries in the World Bank 2017 Doing Business Survey, below the Latin American average. Except for protecting investors (32nd), enforcing contracts (37th) and getting electricity (47th), the business environment is poor.

The control of corruption, ease of starting a business or the simplicity and efficiency of the tax system are among the main shortcomings. If enacted, the future bankruptcy law could enhance the business climate.

After two consecutive years of marked increases (+25% in 2016 and 2015), the surge in corporate insolvencies should moderate to +13% in 2017 and +7% in 2018 as Brazil gradually exits from recession.


Trade structure by destination/origin

(% of total)

Exports Rank Imports
China 20%
19% China
United States 13%
15% United States
Argentina 7%
7% Germany
Germany 4%
6% Argentina
Japan 3%
3% France

Trade structure by product

(% of total)

Exports Rank Imports
Oil seeds and oleaginous fruits 11%
8% Petroleum, petroleum products and related materials
Metalliferous ores and metal scrap 10%
7% Electrical machinery, apparatus and appliances, n.e.s.
Meat and meat preparations 8%
7% Road vehicles
Petroleum, petroleum products and related materials 6%
6% Other industrial machinery and parts
Road vehicles 6%
6% Organic chemicals

The payment behavior of domestic companies is acceptable, though standard payment terms are very varied and DSO remains high.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Given the length and cost of legal actions in Brazil, chances of obtaining enforceable judgments in a timely manner are low and it is preferable to consider amicable arrangements and specialist debt collection methods as a means to avoid domestic courts.

When it comes to insolvent debtors, use of the company rescue mechanisms is increasing; in practice, however, the chances of recovering debt remain extremely low.

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Collection complexity Brazil

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Contact Euler Hermes

Economic Research Team

Contact Georges Dib

Economist for Latin America, Spain and Portugal 

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