By Marcela Ayres
BRASILIA (Reuters) -Brazil’s central bank on Tuesday estimated a sharp decline in profitability among non-financial companies as a result of its aggressive monetary tightening cycle, with median returns falling below levels seen during the COVID-19 pandemic.
The bank so far has raised its benchmark Selic rate by 375 basis points to 14.25% and signaled another hike at its next policy meeting in May, in an effort to tame annual inflation – running at 5.49% in mid-April, well above its 3% target.
In its Financial Stability Report, the central bank projected that the median Return on Equity for publicly listed companies will drop to 3.92% by September 2025, down from 8.92% in September last year, when it began to raise borrowing costs.
If confirmed, that would mark the lowest level since September 2017, when the country was still recovering from its worst-ever recession triggered by a severe fiscal imbalance, collapsing commodity prices and deep political turmoil.
The level is also significantly below the 5.54% recorded in June 2020, the lowest posted during the COVID-19 crisis.
“The central bank estimates that the current interest rate hiking cycle will have a significant impact on non-financial companies, though less severe than during the 2015-2016 recession,” policymakers wrote.
“Corporate payment capacity is expected to decline significantly,” they added in the report.
CREDIT WARNING
The central bank also stressed that credit to households continued to accelerate in the second half of 2024, particularly in higher-risk segments and among lower-income borrowers, even after it began raising rates.
“Financing to the real economy continued to accelerate in the second half of 2024, but financial institutions indicate greater caution regarding risk appetite in 2025,” it said.
The bank noted that household credit growth was especially pronounced in auto loans, with increased financing for older vehicles and smaller down payments, as well as in personal loans with no collateral, where lending standards have deteriorated.
Policymakers said their quarterly survey of financial institutions showed lower risk tolerance for 2025, warning that risks tied to the financial health of households and companies still require vigilance to ensure sound credit issuance.
“This outlook calls for additional caution and diligence in maintaining lending quality, given the risks associated with economic activity, household income constraints, and the indebtedness of both families and smaller firms,” the report said.
(Reporting by Marcela Ayres; Editing by Chizu Nomiyama and Alistair Bell)
