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As a result of the so-called ‘liquidity adjustment’, the adverse perception finds the Brazilian economy in a ‘delicate moment’, facing a ‘cycle of credit losses’, whose ‘yellow signal’ is associated with factors such as an increase in defaults among lower-quality companies; more leveraged companies and recourse to private credit market issuers.
Negative perception of the national economy by the outside world grows
A good dose of distrust and a (sharp) pinch of disdain. These bitter ingredients today constitute the negative perception of international investors regarding the fragility of the Brazilian economy’s fundamentals, whether in the inconsistent fiscal trajectory, the prohibitive cost of credit, out-of-control inflation, the appreciated exchange rate (in favor of the dollar), or the flight of investments.
This perception, also called ‘liquidity or flow adjustment’, brings severe structural consequences for the Brazilian economy, as follows:
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Higher credit and interest costs (Selic): when the global market doubts the government’s ability to balance public accounts, it demands higher risk premiums. This hampers the Central Bank in its strategy of cutting interest rates, making loans more expensive for companies and families.
Exchange rate volatility (high dollar): the outflow of short-term capital from the stock exchange, as seen recently, devalues the real, which results in a spike in inflation due to the increased cost of imported products, global raw materials, and fuels.
Flight of direct investment (FDI): Although the country maintains good attractiveness in sectors such as energy and agribusiness, prolonged distrust causes foreign companies to suspend expansion plans or the construction of new factories in the country.
Stagnation in the stock exchange and infrastructure: B3 suffers from the reduction in trading volume. Additionally, concession and privatization projects, which heavily depend on international capital, may face empty auctions or aggressive discounts.
Study points to ‘antidote’ to reverse negative tide
As an ‘antidote’ that presupposes public will and state commitment, aiming to convert speculative capital that earns returns and then leaves the Brazilian stock exchange (B3) into a long-term profile, some concrete measures are necessary, such as fiscal discipline, inflation control, and a narrative of sustainable growth.
As the newest (involuntary) member of the ‘global alert echo’, issued by PIMCO (Pacific Investment Management Company) – one of the largest global asset managers and a world leader in fixed income investments – ‘raised the alert’ that ‘the credit loss cycle is upon us and arrives in Brazil at a delicate moment’.
The manager’s ‘yellow signal’ was triggered by a combination of factors, such as an increase in defaults among lower-quality companies; more leveraged companies and recourse to private credit market issuers.
Brazilian companies deal with high interest rates and squeezed margins
According to PIMCO, the moment does not favor national companies, as internally, they deal with high interest rates, moderate growth, squeezed margins, and investors less willing to take risks. At the same time, in the external context, risk aversion prevails, global funding becomes more expensive, or investors become more selective.
In its diagnosis, PIMCO made it clear that the country is far from a ‘comfort position’, as the corporate sector faces all sorts of obstacles, from the high cost of capital, a very cautious credit market, and a business environment that demands increasing efficiency. Here, too, the recommendation is deleveraging, renegotiation of liabilities, and financial discipline.
Still internally, PIMCO’s study highlights that the national economy already deals with a combination of high interest rates, moderate growth, squeezed margins, and investors with less willingness to take risks.
But it is precisely at this critical moment that another, perhaps even greater, challenge arises for the Brazilian economy: technological disruption, through the overwhelming spread of Artificial Intelligence and new technologies across the globe. The study states that “the speed of this transformation is what will separate winners from losers”.
Low investment in innovation imposes loss of competitiveness
By coining it as an ‘extra layer of pressure’, PIMCO points out that those companies with little capacity to invest in innovation risk losing competitiveness, when they most need to gain efficiency. However, the resulting financial fragility is not limited to restricting an organization’s ability to react, but can ‘cement’ its operational obsolescence.
And the undesirable effects are already noticeable, as managers and institutional investors have started to apply stricter filters for asset selection, where the available resources, instead of disappearing, are now more concentrated. Bad news, especially for medium-sized companies with more leveraged businesses or weaker balance sheets. For these, credit has become scarcer, more expensive, and more conditioned on guarantees, covenants, and protection structures. Founded in 1971 in the U.S. state of California, PIMCO manages trillions of dollars in assets, with offices in dozens of countries, including Brazil.
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