Financial expenses reached R$306bn in 2023, while capital allocation totaled R$298bn; delay in fiscal target worsens the scenario

04/22/2024

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André Freitas de Moura — Foto: Rogerio Vieira/Valor

Brazilian companies spent more on financial expenses—mainly made up of interest payments—than on investment in 2023, according to a survey carried out for Valor encompassing all domestic publicly traded companies.

They set aside R$306.8 billion for these expenses last year, 8.2% more than in 2022. In the same period, the amount allocated to investment totaled R$298.7 billion, practically unchanged.

Although the economic environment started to worsen in 2021 with the rise in Brazil’s policy interest rate Selic, this situation was not seen in 2022. That year, investments totaled R$299.2 billion, while expenses with interest rates and charges were R$283.6 billion.

Data from financial statements by 386 non-financial publicly traded companies were collected by André Freitas de Moura, a professor and consultant at FGV/EAESP who holds a PhD in accounting and finance from the University of Birmingham.

Although the Central Bank’s move to reduce the Selic after 2023 could mitigate such an impact this year, the government’s decision to postpone the fiscal target achievement has led to a consensus in the market that interest rates will fall slower. The worsening of the global scenario due to the aggravation of the geopolitical environment in 2024 also weighs on companies’ results.

This situation directly impacts investment plans as companies tend to protect their cash reserves. “The same thing we saw in 2022 and 2023 will likely recur in 2024, with still relevant interest rates pressure and persistent net interest rate spread,” said Pedro Magalhães, who served for over two decades as a financial executive at large corporations in Brazil.

According to him, around 70% of banks’ cost in a debt operation with small and medium-sized companies comes from net interest rate spread, which has not been falling. “That affects the cost of capital, and, as a result, investments,” he points out. According to the Central Bank, there was a 0.5 points increase in the spread rate for companies in 2024 (to 9.2% per year). In 2023, it rose 0.2 points.

The net interest rate spread is the difference between interest rates charged by banks on companies and those they pay to raise funds.

A more gradual decline in interest rates could delay a stronger reduction of expenses for companies with debt linked to the Selic. Banks estimate that the stock of corporate debt in the country is currently around R$600 billion considering both publicly traded and privately held companies.

Experts point out that investment movements vary according to each sector. Companies from the consumer segment tend to hold back spending, while those from areas such as telecommunications and paper manufacturers have announced larger investments. That was the situation before the fiscal risk increased a few days ago.

“Companies that were planning to make larger investments are already considering a change in the route. Also, we have seen complaints among entrepreneurs at dinners and private conversations since last week. Higher public debt creates more inflation and affects confidence,” said a businessman in the capital goods sector who has worked in this segment since 1972.

The survey carried out by the FGV professor also reveals that the ratio between expenses and investment cash has worsened.

This indicator increased to 0.84 in 2023 from 0.80 in 2022, which means that for each R$100 that companies allocated in investments, interest expenses to finance growth went from R$80 to R$84.

To avoid distortions, the broad indicator was based on an average of that ratio in all companies surveyed.

Mr. Moura’s study does not consider financial institutions and includes Petrobras and Vale. However, when excluding the two giant companies, there were R$272.3 billion in financial expenses and R$227.8 billion in investments in 2023.

According to Eliseu Martins, a professor emeritus at FEA/USP and a guest member of the Accounting Procedures Committee (CPC), the rise in interest rates weighed on expenses. He points out that the impact could have been even worse but, to avoid the rise, companies reorganized their debts and sought fixed-rate financing, including inflation-indexed instruments.

“When the Selic was at 2% per year in 2020, companies aware that this would not be sustainable tried to avoid the rate,” Mr. Martins said.

“However, there is still a lot of foreign-currency-denominated debt, and, with the exchange rate on the rise, that becomes a concern again due to the scenario of global uncertainty.”

Foreign exchange has an accounting impact on companies, not on their cash, and it is experienced by those with no currency hedging. The exchange rate is up 3.67% against the real in April and 7.13% in 2024.

Although the Selic started to fall after August 2023, the companies considered in their financial statements the peak rate, at 13.75%, in 2022 and much of last year.

The positive effect of the interest rate reduction was not seen until the fourth quarter of 2023. The Selic policy rate is currently at 10.75% per year.

Based on the data collected, Mr. Moura found that the weight of investments in the corporations’ total revenue between 2022 and 2023 fell, while the share of expenses on revenue remained unchanged.

“Publicly traded companies spent a larger amount on interest rates than on investments in 2023, and that was caused rather by the decrease in investment than by an increase in interest expense and charges, which were already high,” Mr. Moura said.

Expenses include interest rates, taxes, and spending on contracting loan facilities. Investments include payment for acquisitions, financial investments, and funds generated by business divestment, among others.

Another survey, carried out by Valor Data with publicly traded companies, reveals the effect of the increase in net financial expenses on these companies’ bottom lines.

According to the numbers, excluding Petrobras, Vale, and companies under court-supervised reorganization, these expenses rose 25% last year, while net earnings fell 12%—to R$186 billion from R$213 billion.

There was a decline in final results despite operating expenses (which also affect profits) rising slightly, around 5%, close to the inflation rate in the same time frame. Only in the fourth quarter, some relief was seen in interest expenses, which fell compared to a year earlier.

Bank analysts expect that the hypothesis of a slower decline in the Selic rate and the appreciation of the dollar against the real will return to the discussion in the first-quarter earnings season, which began last week.

That will be a barometer of how companies are dealing with the two topics. The issue has already been mentioned in the first earnings report by a publicly traded company, released on Thursday (18) by machine maker Romi.

Asked about the change in the interest rates and dollar scenario after the postponement of the fiscal target, CEO Luiz Cassiano Rosolen said the increase in the Selic would have a direct impact on Romi’s customer’s mood.

The executive also pointed out that, in a scenario of timid investments in the sector, the company’s machine rental business is growing. The operation was launched after the pandemic, in 2020. “When our customers are not comfortable investing in acquiring machines, they have the option of renting,” he said. Machine rental orders rose 129% from January to March, compared to 2023. Last year, the increase was 34%.

This debate is expected to gain ground among analysts and companies in segments that are mostly dependent on credit and sensitive to variations in confidence—such as consumer industries and electronics and technology retailers.

*Por Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/