Pandemic’s impacts on economy and companies

Plastics Sector

Kramer Silva – FMB Investimentos

In the beginning of this month, stock exchanges across the world were intensely impacted by Corona Virus contamination in over 190 countries.  Soon after that we had the war of oil prices in the international market, chiefly between Russia and Saudi Arabia, Opec leader (Organization of the Petroleum Exporting Countries), which did not reach an agreement with regard to petroleum production as an attempt to stabilize prices.  So, Saudi Arabia, larger petroleum exporter worldwide, decided to reduce prices and increase the amount produced, making the commodity price drop.

Accordingly, market agents radically changed their expectations with regard to economic indicators and companies’ results. The feeling of slowdown in the global economy may bring relevant consequences to companies’ financial flow, indebtedness levels and availability for payment of debt in real or dollar.

According to Focus report, disclosed by Banco Central, GDP (Gross Domestic Product) for the end of 2020 fell from 2.2% four weeks ago to 1.48% in the last disclosures, on 03/23/2020. Exchange projection (R$ / USD) also rose from R$ 4.15 to R$ 4.50. In face of the crisis installed, the monetary policy committee opted for another cut in Selic interest basic rate, taking it to 3.75% a year.  According to the release, the pandemic caused by COVID-19 is causing this slowdown in global growth, impacting commodities’ prices and generating volatility in market assets.

For companies, according to report “Os impactos do coronavírus para as empresas” (Coronavirus’ impacts on companies) prepared by XP Investimentos’ Research team, the main risks are the increase in the level of leverage measured by Net Debt/EBITDA indicator. The second risk is reduction in current liquidity, that is, less cash available to pay short term debts. Finally, the sharp rise in USD may further press companies with indebtedness or costs linked to the currency.