Valor International / Business

Introduction to Zombie Companies

Brazil has the largest share of so-called “zombie companies” among 25 emerging economies, with a proportion of 16.75%. This is 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 sample was drawn from the MSCI Emerging Markets Index, and the ranking considers the countries with the highest proportion of zombie companies among listed firms.

Methodology

Companies are classified as zombies when they meet two criteria. The first is the relationship between cash generation, measured by EBITDA, and interest expenses—known as interest coverage. For zombie companies, cash generation is lower than interest payments. The second criterion comes from the z-core model, which measures the probability of a company entering court-supervised restructuring; it must be below zero.

Impact of Zombie Companies

The 16.75% share of zombie companies in Brazil corresponds to the average between 2002 and 2021. This figure refers to the static indicator, which looks at results for each year individually. The authors also calculated a dynamic indicator, which takes a three-year average and smooths the impact of more specific factors, such as a recession in a single year. By that measure, Brazil’s percentage is 13.94%, compared with a 5.49% average for emerging markets.

Expert Opinions

Economists and professors argue that zombie companies should “close their doors,” but they manage to extend their survival. In a normal evolutionary process, companies in poor condition should exit the market or go bankrupt. But credit continues to be offered, high-risk securities can be traded as a way to raise funds, or even some government mechanism comes into play.

Factors Contributing to Zombie Companies

Factors such as interest rates, inflation, the tax burden, and transportation and energy costs help explain the higher share of such companies in Brazil compared with other emerging markets. However, poor management is the main reason. Companies manage their debt poorly, even considering high interest rates. Banks keep lending to companies and fail to be careful when granting or renewing loans.

Effectiveness of Monetary Policy

The debate over zombie companies also involves the effectiveness of monetary policy. Various factors affect how interest rate policy works, including cross-subsidies, fiscal policy decisions, and debt renegotiation programs. Signals from economic and fiscal policy, from the government, and from monetary policy, from the Central Bank, dictate the pace of corporate investment.

Conclusion

In conclusion, Brazil has the largest share of zombie companies among emerging economies, with a proportion of 16.75%. This phenomenon is caused by a combination of macroeconomic conditions, management problems, and weak creditor protection. The existence of zombie companies affects the economy as a whole, and it is essential to address the underlying issues to promote productivity and economic growth. By understanding the causes and consequences of zombie companies, policymakers and business leaders can work together to create a more competitive and sustainable economy.