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How the devaluation of the dollar affects Brazilian companies with debt in foreign currency.

After reaching its high in 2020, exceeding BRL 5.80 per dollar, the North American currency has shown a downward trend in 2023. In the last twelve months, the dollar, here represented by the PTAX Venta, presented a fall of 12 .2%, with 8.97% in the year 2023 alone.

This devaluation, keeping other variables constant, can have a positive effect on the Brazilian stock market, since it has a correlation contrary to the movements of the American currency, as can be seen in the following graph:

The stock market is known for its ability to anticipate impacts on the results and operational performance of companies.

So, in addition to the analysis of the index itself, it is possible to measure the potential impact of the devaluation of the US currency in reais on the results of companies for the second quarter of 2023.

In this analysis, the premise is that all foreign currency debts contracted by companies are in US dollars, without taking into account the possibility of debt in other currencies. In addition, this analysis also does not take into account possible hedge or monetary coverage strategies, which could mitigate the impact of exchange rate variations on the results.

The sample only considers companies that had short and long-term debt in foreign currency during the first quarter of 2023, according to the standard taxonomies defined by the Securities and Exchange Commission (CVM), totaling 117 companies. Large players such as Petrobras, Vale, CSN, among others, which have not yet published information on debt in foreign currency, are excluded from this sample.

In the sample, it is possible to rank the companies with the highest debt in foreign currency by taking the sum of short- and long-term debt disclosed in the CVM. ?Suzano S.A., Braskem, Cosan and Klabin stand out. All with more than 20 billion reais linked to debt in other currencies.

When analyzing the total gross debt of companies, around 34% of the debt is in foreign currency. Of this percentage, 83% is classified as long-term, that is, with a maturity of more than one year, in accordance with accounting standards.

As we might expect, exchange variations can have a significant impact on the results of companies that maintain a large part of their debt in foreign currency, especially in dollars.

A historical analysis of the debt structure over time shows that long-term debt accounts for a sizeable portion of total debt. This observation is of great importance, since long-term debt is usually associated with financing capital investments or strategic expansions, which are essential for the long-term growth and survival of the company.

Furthermore, it is interesting to note that the evolution of these debts is intrinsically linked to the price of the dollar. Therefore, currency fluctuations can have a significant impact on the total amount of debt.

However, the consolidated data we are analyzing considers the price of the dollar only at the end of the period, which may not accurately reflect the impact of exchange rate variations during the period. This occurs because the value of the contracted debt may have been affected by different dollar prices at the time of its issuance. In addition, it is important to remember that companies may have exchange rate hedging contracts that fix the amount of the debt, mitigating the impact of exchange rate fluctuations.

Analyzing the past gives us a perspective regarding the impact of exchange rate variations on the financial health of companies.

By maintaining a constant stock of debt in foreign currency, mainly in dollars, a fall in the price of the currency can lead to a significant reduction in the debt burden. Again, it is important to note that this analysis rules out the possibility of debt in other currencies, as well as any currency hedging strategies that may exist.

The total debt in foreign currency presented in the first quarter of 2023 was BRL 318.8 billion. Observing the drop of approximately -5.14% in the price of the dollar between 03/31/23 and 06/30/2023, the amount of this debt could be reduced to BRL 301.9 billion. This would mean a substantial financial gain of BRL 16.9 billion, ceteris paribus.

However, it is important to highlight that although this drop in the price of the dollar may reduce the debt burden in foreign currency, it may also have adverse effects. For companies that rely on dollar-denominated export earnings, a drop in the dollar exchange rate can lead to reduced earnings when converted to real. Thus, the net effects of the dollar's decline on the company's financial health will depend on the specific relationship between the company's foreign currency debt and dollar earnings.

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