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Brazil’s industry struggles to weather Covid-19 crisis

. Jun 09, 2020
Brazil’s industry struggles to weather Covid-19 crisis Workers in Mogi das Cruzes. Photo: Alf Ribeiro/Shutterstock

With the first figures on the economic impacts of the pandemic coming to light, the toll that social isolation and lack of demand has taken on Brazilian industry is evident. While a steep fall in production and plummeting investments were already expected due to stay-at-home measures, the fact that this coincided with a pained recovery from the 2015-2016 recession sparks concerns about how well the sector will be able to regain its footing in the post coronavirus economy.

Data from the Institute for Applied Economic Research (Ipea) shows that investments in fixed-capital assets — such as machines, equipment, and real estate used to increase production — dropped by 27.5 percent between March and April, the first full month of stoppages due to Covid-19. 

In comparison to April 2019, production shrank by nearly one-third.

</p> <p>The data is consistent with the <a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/06/03/covid-19-brazilian-industry-has-its-worst-april-in-18-years/">18.8-percent plunge</a> in industrial production measured by the national statistics bureau in April, the worst performance for the month since 2002. Furthermore, fixed capital assets are used to increase the country’s overall productivity, serving as a bellwether for future growth. As Ipea shows, the level of investment plunged during the recession and remained significantly below the peak reached in 2013 and 2014.</p> <p>According to Renato da Fonseca, manager of research and competitiveness at the National Confederation of Industries (CNI), the drop in current investments was expected, but becomes even more of a concern on the back of an already weak performance.</p> <p>“This concern comes from the 2015-2016 crisis. Recovery was slow and then we had another crisis. Does it affect the future? Certainly, because growth relies on productivity, on investment in capital goods, management, and innovation. And innovation had the biggest drop because it is riskier and aimed at the long term,” he told <strong>The Brazilian Report</strong>.</p> <p>In his view, the current shock affects demand — as consumption was disrupted — so, as long as businesses reopen and the economy gets back on track, investments should resume. However, for that to happen, public policies have to ensure it doesn’t turn into a supply crisis: in other words, a recession caused by widespread company bankruptcies.</p> <h2>Industry sector holding on</h2> <p>A CNI <a href="https://noticias.portaldaindustria.com.br/noticias/economia/66-das-empresas-industriais-nao-demitiram-por-conta-da-pandemia-mostra-pesquisa-da-cni/">survey</a> shows that as of June 8, 66 percent of the industries managed to avoid lay-offs by &#8220;suspending&#8221; job contracts or slashing salaries and working hours. At the same time, 45 percent of the companies said they only have enough cash for another three months, and their main financial concerns are paying taxes and honoring payroll.</p> <p>The Economy Ministry committed itself to covering the wages of employees who suffered salary cuts, as well as delaying taxes for three months. As these measures expire in June, Mr. Fonseca believes the government will have no other option but to extend them.</p> <p>“It makes no sense to save companies for three months just to let them go bankrupt on the fourth. When they were proposed, we were looking at China and expected the process would last three months, but the truth is the pandemic is still not under control,” he said.</p> <p>In this sense, he adds that it is essential to improve credit conditions, which remain tight despite banks having provided nearly <a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/06/01/brazilian-banks-loan-almost-brl-1-trillion-amid-crisis/">BRL 1 trillion in loans</a> since the beginning of the pandemic.</p> <p>During an event on June 8, the Central Bank’s regulation director Otávio Damaso said that the demand for credit, especially for small and medium-sized enterprises (SMEs), rose by 300 percent and the financial system is unable to keep up. However, according to the Secretary of Economic Policy, Adolfo Sachsida, the Economy Ministry is elaborating a “plan B and a plan C” to make sure credit reaches small companies, likely to be backed by the National Treasury, as <a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/06/01/brazilian-banks-loan-almost-brl-1-trillion-amid-crisis/">reported</a> by news website G1.</p> <h2>Signs of trouble</h2> <p>The hardest-hit sectors of the economy have shown they will need more than credit lines to make through the year. As we showed in our May 21 story, the Brazilian National Development Bank (BNDES) — historically, the main funder of infrastructure in the country — was <a href="https://brazilian.report/business/2020/05/21/could-covid-19-spark-rebirth-brazil-development-bank/">called to the rescue</a>. Airlines were the first to receive a bailout <a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/05/15/bndes-social-development-bank-to-bail-out-brazilian-airlines/">estimated at BRL 2.4 billion</a> — considering BNDES’ investments alone — but now the bank is expanding operations.</p> <p>As of June 8, the government injected <a href="https://www.poder360.com.br/economia/bndes-lanca-programa-de-r-2-bilhoes-em-credito-para-empresas-de-saude/">another BRL 20 billion</a> into the bank, aiming to accelerate credit concessions to SMEs. Another highly anticipated measure is a deal between the BNDES and private banks to <a href="https://valor.globo.com/empresas/noticia/2020/06/06/socorro-a-montadoras-deve-ter-cerca-de-r-4-bilhes-por-empresa.ghtml">bail out automobile companies</a>, as reported by news site Valor Econômico. Though companies requested loans of up to BRL 7 billion (USD 1.4 billion), the total amount per company is expected to be set at BRL 4 billion.</p> <p>With 64 out of the country’s 65 car manufacturers suspending activities due to the pandemic, production in May was 90.8 percent lower than the previous year. Earlier in May, our Covid-19 live blog reported that in April 2020, Brazilian motor vehicle production <a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/05/08/brazilian-auto-industry-registers-worst-month-in-history/">fell by nearly 100 percent</a> in comparison to April 2019.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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