A word from the President

Leia em Portugues

Pandemic imposes “new normal” on the credit market

Osmar Roncolato Pinho

The world is experiencing an unusual crisis, unlike any other, which knows no borders, with devastating effects on health and economic activity. We still do not know how the post-coronavirus scenario will be like, but the scenario ahead of us is one of many uncertainties and difficulties.

According to the International Monetary Fund (IMF), the global economy will have a 3% retraction this year and should go down in history as the worst recession since the 1929 crisis, known as the Great Depression.

The IMF’s estimate for Brazilian GDP is a 5.3% contraction in 2020, a figure in line with the projections of the World Bank (-5%) and the Ministry of Economy of Brazil (-4.7%). For the United States and Japan, GDP is forecast to fall by 5.9% and 5.2%, respectively. But there are consultancies and analysts who consider these projections even conservative. To check.

The social distancing and the consequent containment of industrial production, adopted in Brazil as of the second half of March, have not yet been captured by the financial statements for the first quarter of 2020, and the negative effects of covid-19 on the results of companies should be perceived with intensity only in the balance sheets from the second quarter onwards.

The projections of a decline in GDP and the high degree of uncertainty have already caused a significant drop in investments. According to a survey carried out by Bradesco based on data compiled by the press, the number of investment projects in Brazil, which had been around 100, dropped to 75 in March and, in April, to 30. And most of the investments now refer to public sector projects in the health field.

To combat the negative effects of the coronavirus pandemic on the financial system, the Banco Central announced a series of measures that should help to unlock corporate credit, helping to maintain the investment capacity of the productive sector. The BC (Banco Central, “Central Bank” in English) announced the availability of R$ 1.216 trillion (equivalent to 16.7% of GDP), to maintain the liquidity of the financial system. The value is much higher than that announced after the 2008 global crisis, when the BC offered liquidity of R$ 117 billion (3.5% of GDP).

One of the first measures was to reduce the compulsory deposit rates, in order to allow funds, which were stopped at banks, to be directed to loans, mainly for companies. Another measure that is part of the R$ 1.2 trillion package is the Special Temporary Liquidity Line (LTEL – Linha Temporária Especial de Liquidez, in Portuguese), based on Guaranteed Financial Bills, which will release R$ 91 billion. The purpose is to stimulate the normal functioning of the credit market.

There is a relevant and coordinated effort by the government to meet the needs of all economic sectors and ensure the operation of the activity. An example is Conta-Covid, a bailout of around R$ 10 billion to the electricity sector to allow it to take out new loans. Small and medium-sized companies are also being provided with emergency credit lines through BNDES.

The auto segment, including dealerships and auto parts suppliers, was highly contaminated by the pandemic. New car sales fell 76.8% in April, the first full month of social isolation. Car rental companies, responsible for 20% of Brazilian auto production, have seen vehicle rental fall 90% since the beginning of the pandemic. According to estimates by automakers, the sector will need something around R$ 40 billion, equivalent to what would be invested in 3 to 4 years, to get through this crisis.

As in Brazil, governments around the world are committed to mitigating the impacts of the pandemic, adopting packages of measures that give financial relief to companies and families, obeying the limitations of the public coffers of each economy. These are temporary expenses for countries, but essential to ensure the preservation of production chains and their financial health for companies, avoiding a generalized picture of social difficulties resulting from the drastic reduction in the level of employment and income in societies. For this, it is essential that the financial market continues to direct credits to production chains.