(O Globo) Rising Costs of Imported Inputs and an Uncertain Environment Push Companies to Reduce or Postpone Investments
By João Sorima Neto and Bruno Rosa — São Paulo and Rio, 01/26/2025
Investment delays, increased expenses for companies with dollar-denominated debt, and rising production costs—after a better-than-expected economic growth in 2024, these are the struggles faced by Brazilian companies of all sizes. Business leaders describe the current scenario as a perfect storm: the benchmark interest rate (Selic) at 12.25% per year (with expectations to reach 15% by the end of 2025), a strong dollar (a 27% increase last year), and uncertainties surrounding Brazil’s public finances and the new Donald Trump administration in the U.S. As a result, the prevailing strategy among companies is to invest and hire less in order to weather the expected challenges of 2025.
— In addition to higher interest rates, there is greater uncertainty both domestically and abroad, which limits consumption and investment decisions, negatively impacting the economy and corporate performance. The possibility of U.S. tariffs on imports could make Brazilian products less competitive in the American market compared to locally produced goods or those from other regions with lower tax rates, — says economist Alessandra Ribeiro, director of Macroeconomics and Sectoral Analysis at Tendências.
Investment Cutbacks
Assaí, one of Brazil’s largest retail chains, initially planned to open 20 new supermarkets in 2025 but has now reduced that number to 10. The company aims to cut between R$ 650 million and R$ 750 million while still investing between R$ 1 billion and R$ 1.2 billion this year. The current focus is on reducing debt, with plans to resume its expansion strategy of 20 new stores per year in 2026.
In a statement to the market, Vitor Fagá de Almeida, Assaí’s Vice President of Finance and Investor Relations, explained that the decision took into account “recent increases in the Selic rate and changes in interest rate expectations for the coming years, which directly affect the cost of carrying the company’s net debt.”
‘Out of Oxygen’
Rodrigo Mello, partner at Seneca Evercore, a financial advisory firm specializing in mergers and acquisitions, restructuring, and capital markets, notes that rising interest rates are worsening the situation for struggling companies that are already “out of oxygen.” Last year, there was a 70% increase in bankruptcy protection filings in Brazil, according to Seneca’s data.
Meanwhile, the Brazilian Observatory of Out-of-Court Restructuring (Obre) reported that in 2024, renegotiated debts outside the court system rose by 385% compared to 2023, reaching R$ 37.4 billion. Retailers like Tok&Stok and Casas Bahia, cement producer InterCement, and petrochemical company Unigel were among those seeking such agreements.
— High interest rates hurt businesses across the board, from startups to existing liabilities and investments, — says Mello.
‘Is This the Right Time?’
The challenging economic landscape has prompted Frescatto Company, one of Brazil’s leading seafood processing companies, to put on hold the construction of a new factory in the Baixada Fluminense region. Rafael Barata, the company’s Director of Foreign Trade, emphasizes that protecting cash flow and reassessing investment plans is now a priority:
— We had major investment plans for this year, including the construction of a new production unit in Duque de Caxias (RJ), right next to our current factory. We decided to hold off for now. We won’t start this project until we have more clarity about what lies ahead.
The company had planned to invest in advanced fish-processing technologies to improve productivity, but Barata says the high cost of capital and market uncertainties make the expected return unclear. The only plans moving forward are in the retail segment: the opening of three stores in São Paulo and the renovation of two stores in Rio.
— Given the current situation, should we build a higher-capacity factory only to see the economy suddenly slip into recession, leaving it underutilized? Is this the right time? — he asks.
To offset the impact of the stronger dollar, Frescatto has been exploring alternatives to imported inputs such as salmon. To cope with expensive credit, the company is prioritizing suppliers that offer longer payment terms.
For companies that rely on imported inputs, the volatile exchange rate of recent months is a major concern. Dexco (formerly Duratex), a construction, renovation, and home decor company, has scaled back its investment plan, reducing its 2021-2025 budget by about 30% from the original R$ 2.1 billion.
— The rising dollar affects both input costs and logistics expenses, which are critical factors in our industry. Higher interest rates make construction and investments more expensive across our supply chain, — explains Francisco Semeraro, Dexco’s CFO.
Lack of Currency Hedging
Even though the dollar eased below R$ 6 last week for the first time in two months, prolonged depreciation of the real remains a concern. According to Rodrigo Gallegos, a partner at RGF Consulting, which specializes in corporate restructuring, eight out of ten companies the firm advises lack financial instruments to hedge against currency fluctuations.
— These companies don’t factor in the possibility of a sudden and sharp depreciation of the real. And rising interest rates have a direct impact on their cash flow, — he says.
Aidu, a small São Paulo-based manufacturer of aerosol food products such as foams for cocktails and non-stick sprays, has been struggling with the rising price of a commodity that Brazil produces in abundance: soybean oil. As a globally traded commodity, its price is dollar-based and has surged more than 40% since last June, according to the company’s founder, Renato Gibertoni:
— We held out as long as we could, but we had to pass on a 6.5% price increase to customers, even as margins fell and production costs rose.
At Usaflex, which generates over R$ 500 million in annual revenue from footwear and accessories made in four factories across Brazil, imported chemical inputs and decorative components for its products have become significantly more expensive. CEO Sergio Bocayuva says the new dollar exchange rate is concerning:
— Chemical companies typically have four to six months’ worth of input inventory. But if the dollar doesn’t drop, price increases will follow. The stronger dollar has already raised our costs by about 20%, and we’ve had to pass on 2% to 3% of that increase to consumers.
The high interest rates, Bocayuva adds, are also hurting sales and slowing the expansion of Usaflex’s retail franchise network. In 2024, the company opened 34 stores, significantly fewer than the 50 in the previous year.
‘Inflation Is Gaining Momentum’
If high interest rates are making credit more expensive, the strong dollar is unsettling companies with foreign-denominated debt. A study by Elos Ayta consulting, covering 102 publicly traded companies on Brazil’s stock exchange (B3), found that in the fourth quarter of last year alone, the appreciation of the dollar increased their foreign currency debt from R$ 353 billion to R$ 401 billion.
— That’s an additional R$ 48.2 billion in financial expenses just due to exchange rate fluctuations, — says Einar Rivero, CEO of Elos Ayta. He also notes that companies are shifting from short-term debt to long-term obligations: between 2023 and 2024, the proportion of long-term debt among non-financial companies listed on B3 rose from 82.6% to 86.2%.
Only ‘Sure-Fire’ Investments
Limppano, one of Brazil’s largest manufacturers of cleaning products, invested R$ 50 million in its two factories in the Greater Rio area in 2024. This year’s budget remains uncertain, but Vice President Tarcísio Bravo Júnior is certain it will be lower. He cites the combination of a strong dollar, rising inflation, and increasing interest rates, along with concerns over Brazil’s fiscal policy, as reasons to conserve cash.
— Our strategy is to keep inventory as low as possible, make purchases cautiously, and scrutinize every expense. The old saying ‘cash is king’ has never been more true. The goal is to rely as little as possible on bank financing, — says Bravo Júnior.
— All our costs are rising. Every day brings a new surprise because in the chemical industry, a significant share of inputs are dollar-denominated or priced in dollars. More than 60% of our inputs are linked to the dollar. That means our costs have gone up, and, unfortunately, we’ve had to pass them on to consumers. Inflation is gaining momentum.
High interest rates, says Mello from Seneca Evercore, encourage entrepreneurs to keep their money protected rather than financing new projects. When invested in fixed income, it yields 12.25% per year with low risk. He notes that in recent acquisition deals he has advised on, companies have preferred to acquire others using stock instead of cash from their reserves.
Last week, the dollar fell below R$6 due to the absence of the “tariff hike” promised by Trump before taking office. Even so, exporting companies are taking precautions for this scenario. In the steel industry—one of Brazil’s top exporting sectors to the U.S.—concerns go beyond Trump’s trade barriers. There is also fear of an influx of Chinese steel into Brazil under unfair competition conditions.
For Gerdau’s CEO, Gustavo Werneck, it is still too early to assess potential impacts at this initial stage. The Brazilian group benefits from operating 14 long and special steel production units in the U.S., Mexico, and Canada.
— In this context, the promised tariff measures could even benefit the company by protecting local producers, limiting excessive imports of steel, and curbing unfair competition in the country — says Werneck, who is more concerned about the fate of Chinese steel that could be blocked from entering the U.S.
Published in O Globo (01/26) and available at https://oglobo.globo.com/economia/negocios/noticia/2025/01/26/com-dolar-juros-e-trump-tempestade-perfeita-leva-empresas-a-adiar-projetos.ghtml
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