Brazil is going through a traumatic time in its battle with Covid-19. The country has the second highest death toll in the world after the US, amid president Jair Bolsonaro’s controversial handling of the crisis and poor collaboration between the federal and state authorities.
However, actions taken by the Central Bank of Brazil last year have helped alleviate the economic fallout, keeping the unemployment rate at about 13.5%.
Emergency measures have sought to address credit scarcity in different ways and the liquidity released has exceeded 16% of gross domestic product (GDP).
Indebtedness at non-financial companies is the highest it has been in decades (more than 58% of GDP). However, the emergency measures have helped Brazilian companies post the lowest levels of default and the highest degree of liquidity in recent years.
In particular, access to credit programmes implemented from June 2020 onwards have been decisive in easing the crisis and preserving jobs. The government has encouraged lending to small and micro businesses, which can be most at risk during times of crisis.
The release of credit has primarily been made up of three programmes, the first (Peac-FGI) worked with the government to give guarantees to banks to grant credit, benefiting 136,000 companies.
The second programme (PESE) provided low-cost credit to small companies with the sole purpose of financing the payment of employees’ payroll and the discharge of labour costs, but with the condition of non-dismissal of workers, benefiting 135,000 companies.
The third programme (Pronampe) provided low-cost credit to small businesses with payment terms of up to 36 months, but without the need to justify the use of resources, and has served 517,000 companies.
Information asymmetry
The most popular programme (Peac-FGI) has been responsible for 62% of all credit granted during the period. The programme avoided one of the key determinants of the credit restriction: information asymmetry.
The higher credit risks at micro and small companies is because they typically have higher profit volatility, higher bankruptcy rates, less product and customer diversification and difficulties in offering assets that are accepted as loan guarantees. These factors, combined, increase the information asymmetry between such companies and potential creditors, especially in times of crisis, and can reduce the availability of credit.
In times of crisis, [emergency credit] programmes that require a counterpart from companies, such as the ban on firing employees, do not work as well
The other two programmes (Pronampe and PESE) offered credit directly to companies, but had a sizeable difference in the volume and quantity of contracts between them. Pronampe has been more accepted by market agents and proved to be more successful.
The lessons that can be drawn from the difference in performance between the two programmes is that in times of crisis, programmes that require a counterpart action from companies, such as the ban on firing employees, do not work as well.
In these difficult times, uncertainty is high and borrowers are averse to risk, preferring to avoid making commitments that may compromise the survival of their business. However, with the prolongation of the crisis, they typically tend to sidestep these concerns.
There are signs difficulties are already beginning to appear. There should be a compromise in the payment capacity of borrowers of funds from emergency programmes, which could cause a wave of defaults that would further compromise the high levels of Brazilian public debt.
According to data from the Brazilian central bank, the gross debt of the federal government reached 89.7% of GDP in January 2021, representing an increase of 15.4 percentage points in relation to December 2019.
As the public debt rises, the government's ability to deliver new measures to combat the pandemic diminishes. The further it rises, the less space there will be in Brazil to combat the pandemic via stimulus credit to help the most vulnerable companies.
As the second wave of Covid-19 in Brazil intensifies, there is a risk it could compromise all the efforts that have so far limited the economic fallout and avoided unemployment spiralling out of control. The resultant economic wounds may take a very long time to heal.
Fabio Gallo Garcia is a professor of business at Fundação Getulio Vargas's São Paulo School of Business Administration.
