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Impacts of the Brazilian economic crisis on the trade credit insurance

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The Brazilian economic reached the end of 2016 in a dramatic situation and the overall perception of investors and executives is that the economic crisis is not really over yet, somehow contradicting the perception that during the course of 2017 the country would see the restart of economic growth, even if in a slow and gradual pace.

 

Since 2014, economic growth had dropped sharply and was followed by two years of a strong recession which had heavy impacts on both the manufacturing and retail sales volumes, resulting from the reduction of consumption levels across all economic segments.

 

 

The sudden drop of GDP caught companies off guard as most segments had been demonstrating strong growth levels during the previous years and, as a general rule, companies were investing to keep up with the increasing growth opportunities. As it is illustrated in a study released by Economatica, a local consulting firm specialized in economic research, which researched 262 publicly traded companies, the gross corporate level of these firms increased 121% between the end of 2010 and 2016, surpassing the mark of US$ 300 billion. The situation was that, at the end of 2016, companies found themselves highly leveraged right during the economic train wreck the country experienced. While large companies have financial flexibility to adjust its debt profile, small and mid size enterprises could not adjust as fast and estimates are that over 2,000 million business shut down. As expected, corporate insolvencies reached record levels with the number of the local equivalent of chapter 11 filings more than doubling when compared to previous years.

 

 

The local Serasa Experian data shows that in 2015 and 2016, there were 1,287 and 1,770 cases of company reorganization legal filings, a growth of 55% and 113%, respectively, when compared to 2014.

This outcome was expected but its severity was significantly worse than all of the anticipated worst case scenarios. In the past few years, companies were increasing its leverage ratios and the combination of severe reductions on sales volumes with increasing costs, results from high inflation levels, slash corporate profit margins making impossible to carry forward the historical high debt levels.

 

The impacts of the economic crisis have been clearly felt by the local trade credit Insurance market.

 

The widespread impact of corporate insolvencies across all business segments trigged the market loss ratio to remain above 130% for the past two years. For the same reasons, growth between 2015 and 2016 was very small, a shy 2%, as trade volumes have been reduced and companies not renewing policies often due to credit limit reductions resulting from the risk reviews and cancellations conducted by the insurers.

 

 

The positive news for the Brazilian trade credit insurance landscape is that, despite the negative results of the last two years, there are nearly 10 active insurers with a wide range of product availability and plenty of risk capacity in the local market. Once the economic recovery gains momentum and confidence is restored in the company, the crisis should be replaced by a period of consistent growth.

 

 

Brazil is entering 2017 under heavy stormy clouds, both in terms of economic outlook and political turbulence, so constant monitoring will be required on the risk level of local corporates. Lockton Brazil is prepared to continue supporting our local customers and global partner, with one of the largest and more experienced trade credit insurance teams in the market, with 7 dedicated professionals with large industry expertise and market knowledge. We have also made heavy investments in technology making available to our customer sophisticated yet user friendly platforms to manage credit insurance policies and credit risk management.

 

Despite the economic tragedy of the past two years, Brazilian economic remains one of the largest and more diversified among emerging markets and the economic recovery will begin sooner or later. In the meantime, our customers can count of Lockton’s vigilance and knowledge to weather through this challenging moment.

 

Many thanks to Guilherme Perondi and Franklin Nogueira, our Astreos Partners from Lockton Brazil for this great article