Brazil tops emerging markets in share of ‘zombie companies’

Introduction to Zombie Companies

Brazil has the largest share of so-called “zombie companies” among 25 emerging economies. The proportion reaches 16.75% in Brazil, more than twice the 7.58% average for the group and well ahead of Turkey, which ranks second with 13.75%. Zombie companies are firms whose earnings are insufficient to cover interest payments on their debt.

What are Zombie Companies?

The concept of zombie companies refers to firms that survive thanks to cheap credit, which distorts market adjustments and hurts productivity. A zombie company is a walking dead, synonymous with an unproductive firm. These are companies that not only take on debt but struggle to generate profits and continue operating despite being unproductive. They also invest less, which affects the economy as a whole.

Causes of Zombie Companies in Brazil

Macroeconomic conditions such as extremely high interest rates and slower GDP growth help explain Brazil’s leading position in the ranking. Management problems in Brazilian companies and weak creditor protection also contribute to the phenomenon. The country’s messy macroeconomic environment and high cost of capital create an odd situation where zombie companies are proportionally much larger than in the rest of the world.

Research and Findings

A study published by Alberto Granzotto, a researcher at the Federal University of Santa Maria, found that Brazil has the highest share of zombie companies among 25 emerging markets. The study compared interest rates and financing conditions across those countries, with Brazil showing the highest figures. The researchers used two criteria to classify companies as zombies: the relationship between cash generation and interest expenses, and the probability of a company entering court-supervised restructuring.

Impact of Zombie Companies

Zombie companies are rarely discussed in Brazil, but they significantly affect productivity. Factors such as interest rates, inflation, the tax burden, and transportation and energy costs help explain the higher share of such companies in Brazil. Poor management is the main reason for the low productivity of the economy. Zombie companies are typically poorly managed companies that take on debt and struggle to generate profits.

Expert Opinions

Economists and researchers agree that zombie companies are a common problem in Brazil that affects productivity. Paulo Feldmann, a professor at the University of São Paulo, says that poor management is the main reason for the low productivity of the economy. Vitor Vidal, an economist at consultancy VVC, says that Brazil’s higher share of zombie companies reflects the country’s messy macroeconomic environment.

Conclusion

In conclusion, Brazil has the largest share of zombie companies among emerging economies, which affects productivity and the overall economy. The causes of zombie companies in Brazil are complex and multifaceted, including macroeconomic conditions, management problems, and weak creditor protection. It is essential to address these issues to promote a more productive and efficient economy. By understanding the concept of zombie companies and their impact on the economy, we can work towards creating a more favorable business environment that encourages productivity and growth.