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Brazil intervenes in the credit market, but is it too little, too late?

. Mar 16, 2020
The Covid-19 pandemic could cause irreparable damage to the tourism and travel sector, with many companies expected to go bankrupt amid market chaos Flight cancelation rates reached 85 percent in March. Photo: Tupungato/Shutterstock

As part of a long-awaited stimulus package to fight off the economic impacts of the Covid-19 outbreak, the Brazilian Monetary Council (CMN)—the watchdog of the country’s financial system—has announced measures to make it easier for families and companies to renegotiate their debts and allow banks to keep the credit flow steady. The decision, however, comes after tourism firms and airlines warned about systemic bankruptcies in their sectors following havoc on the stock exchange.

On Monday, the Central Bank—one of the institutions represented by the CMN, alongside the Economy and Planning Ministries—waived the need for banks to increase provisions to renegotiate debts over the next 6 months, a decision that may impact loans adding up to BRL 3.2 trillion. It also partially altered the bank’s capital requirements for a year to increase credit concessions by up to BRL 637 billion.

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measure is aligned with Economy Minister Paulo Guedes’ plan to foster credit to help companies in distress—while <em>not</em> using public money in the process.</p> <p>“When times are good, airlines earn BRL 1, 2, 3 billion. But when times are hard for them, they need public funds? Or maybe they might get a loan for working capital,” Mr. Guedes told <a href="https://www.cnnbrasil.com.br/business/2020/03/14/se-nos-entregarmos-a-psicologia-do-fracasso-havera-desaceleracao-diz-guedes"><em>CNN Brasil</em></a>. “Does Brazil prefer to give money to an airline today or to fight coronavirus?”</p> <p>But, while the Central Bank reassures its trust in the National Finance System, saying it is ready to battle the crisis, are Brazilian companies as solid?</p> <h2>The biggest tourism crisis of an era</h2> <p>In a letter sent to the Tourism Ministry on March 13, ten tourism-related businesses considered the pandemic as the “biggest crisis the sector faces in this era,” and said they expect a high number of bankruptcies in the short-term future.</p> <p>According to them, cancelation rates have already reached 85 percent in March. “Considering that [one year ago] the sector’s revenue was BRL 19.2 billion, the immediate impacts are raising concerns on business sustainability, as there are no estimates of new revenues,” read the joint statement.&nbsp;</p> <p>In order to provide assistance for companies, associations demand special credit lines from public banks with a minimum six-month grace period before the first payment is due. They also want the government to delay payroll taxes for six months, lift income tax on transfers to pay for services abroad, and free up money from workers&#8217; mandatory severance fund FGTS for employees of tourism companies.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1594669"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>They also want the Justice Ministry to stand in favor of rescheduling trips as opposed to canceling, “as the agencies do not have enough reserves to refund customers.” In this sense, they want the ministry to take previous guidance about the issue, published early in March, and turn it into a binding standard.</p> <p>As economists have warned, airlines are among the hardest-hit companies in this crisis. On Monday, the Brazilian Association of Airlines said that Brazil’s demand for domestic flights has dropped by 30 percent and by 50 percent for international flights from one year ago.&nbsp;</p> <p>The association says it has already contacted the Minister of Infrastructure, Tarcísio Gomes de Freitas, asking for similar aid measures requested by tourism companies: tax exemptions for fuels and tickets, tax exemptions on payroll amounting to 1 percent of gross revenues, temporary waiving and reduction of airspace control fees, ending income tax on the lease of airplanes, motors, and components, suspending taxes on payments made abroad, and special credit lines.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p> <p>Brazilian airlines are not alone, as global perspectives for the sector are scary. According to Sydney-based consulting firm <a href="https://centreforaviation.com/analysis/reports/covid-19-aviation-impact-capa-daily-update--16-mar-2020-517569">CAPA Center for Aviation</a>, “by the end of May 2020, most airlines in the world will be bankrupt” and there is no sign of going back to normalcy any time soon.&nbsp;</p> <h2>Beyond traveling</h2> <p>With an increasing number of public events being canceled, such as <a href="https://brazilian.report/sports/2020/03/16/brazilian-football-times-covid-19-stoppage/">football matches</a> and concerts, the economic impacts of the Covid-19 outbreak are likely to spill over into other sectors, suggesting that tourism will not be the only area in need of assistance.</p> <p>One of Brazil’s major entertainment companies Time4Fun has just postponed the Brazilian edition of the Lollapalooza music festival, pushing the event from April to December and offering customers refunds if the new date does not suit them. The blow happens after Time4Fun recorded a 34-percent drop in revenues in 2019, for which it blamed the slow economy and changes to lower tax incentives for cultural ventures.</p> <p>The company is also organizing two Taylor Swift concerts in São Paulo in July—which have, for now, been maintained. But markets have priced in grim perspectives for Time4Fun: year-to-date performance shows an astonishing 66-percent freefall at São Paulo’s stock exchange.</p> <p>Moreover, in a note to clients, BTG Pactual analysts said the lack of visibility on how the Covid-19 outbreak will affect the event company&#8217;s business “may prevent the stock from re-rating significantly in the mid-term.”

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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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