The empirical analysis indicates that there was a process of significant restructuring of the financial profile of the companies between the years 2012 and 2019. Graph 3Footnote 19 shows that from 2015, over 50% of the larger non-financial Brazilian firms were in a speculative and Ponzi position.Footnote 20 According to the data displayed on IMF Datamapper – Global Debt database, the indebtedness of the NFC sector in Brazil was about 43.8% of GDP in 2019. The indebtedness of the companies included in the sample equals to 14.7% of GDP in the same year. This means that the volume of debt of the companies in the sample represents approximately 34% of the total indebtedness of the aggregate of all non-financial companies in the Brazilian economy, which indicates the representativeness of the sample.
The changes in the relative percentage of profiles between 2012 and 2019 are linked to the impacts of the economic crisis that hit Brazil in 2015–2016. In 2016, 15% of the largest non-financial companies in the sample were in a Ponzi position. If we consider only the inflow of operating profits (excluding financial income) to calculate the financial posture of the firms, more than half of them in 2015 (52%) and in 2016 (59%) were in the Ponzi category. According to Carvalho (2018), the close relationship between financial capital and productive capital has its expression in Brazil marked by the greater importance of firms’ treasury investments. Thus, the thesis that financial revenues gain greater prominence in financialized economies is reinforced.Footnote 21
Furthermore, Graph 3 shows that the scenario started to reverse from 2017 onwards, with a reduction of non-financial companies in the Ponzi situation. The improvement in the financial profile of companies as of 2017 was mainly driven by the slight increase in their operating profits in the period, which, coupled with the mitigation of financial expenses,Footnote 22 allowed part of the companies to slowly restructure their cash flow after the 2015–2016 recession. The evolution of the weighted aggregate financial stability index (AFFI) is shown in Graph 4, considering two definitions of the AFFI: (a) AFFI considering the cash inflow as defined considering (π) and (b) “AFFI excluding FI”, that is, considering the operating profit only.
Looking at the entire series, the AFFI indicates that the large non-financial companies had a predominance of speculative-hedge profiles. From the sample used in this paper, the analysis does not take into account the firms’ classification by size or sector.Footnote 23 Regarding this matter, Davis (2016) brings important contributions by identifying different patterns of financialization depending on the size and sector of firms. According to the econometric tests presented in the article, the author points out that deleveraging is one of the stylized facts of financialization in small companies in the USA, mainly due to easier access to working capital. Although there is a difference between the sizes of companies listed B3 – Brazilian stock exchange (especially the huge Petrobras S.A. and Vale S.A.), it is understood that all of them can be considered large. The analysis based on the two proposed scenarios can signal the degree of dependence of firms on their non-operating results to meet their financial obligations. When disregarding financial revenues, a very significant gap is noted. That is, financial revenues contribute to mitigating the financial instability of the economy in the sense of Minsky (1986).Footnote 24
In 2013 is when the AFFI index reached its highest level. In other words, the companies classified as hedge and speculative predominated. This is the moment that, according to Minsky, precedes the cyclical reversal. The index reaches its minimum value in 2016, in line with the increase in the number of companies in the Ponzi situation that year. From 2016 onwards, there has been a process of recovery, indicating a restructuring of the cash flow of companies to reduce financial instability. However, the recovery has not yet allowed the degree of financial stability in the post-2015 crisis period to reach the pre-recession levels.
Graph 5 shows the evolution of the cash inflow (on the left) and the cash outflow (on the right) for the whole sample of non-financial firms and compares both flows with the AFFI.
The evolution of the AFFI and the operating profit has similar trajectories, with the exception of 2015. Even so, the worsening of the AFFI in 2015 and 2016 is accompanied by a fall in operating profit in 2015. On the other hand, from 2016 on, there is an increase in the amount of amortization paid by non-financial companies. In 2019, the fall in the operating profit and the continued growth in the amortized volume caused a deterioration in the AFFI that year. Regarding financial income, the graph shows that it exceeded operating profit in 2015–2016. There are two reasons for this: (a) the crisis negatively affected the operating profit of companies, and (b) the high interest rates between 2015 and 2016 led to a higher return on financial assets held by the companies.
Thus, the increase in amortization paid since the recession suggests a strategy of restructuring the debt profile in order to alleviate future cash flow commitments. In order to better understand this behavior, the values referring to the volume of new loans and funding from financial institutions were incorporated into the analysis, as well as the volume of new investments and the amount of loans of long-term liabilities.Footnote 25 This is shown in Graph 6.
In 2019, the increase in amortizations in relation to 2018 (8.4%) was accompanied by greater funding (19.2%) and a reduction in the loans of long-term liabilities (− 4.2%), while investment intensified its downward trend (− 2.7%). Graph 6 also shows a sustained downward trajectory in long-term liabilities since the peak of the series in 2014. Taken all together, the evolution in the amount of amortization and funding and long-term liabilities points to a restructuring of the debt profile of the non-financial companies. When adding new loans and the level of investment to the analysis, a possible interpretation is that non-financial companies are using the funds raised in order to roll over their past debt and are postponing investment expenditures.
Some hypotheses can be made to interpret the causes of the debt rollover. In 2019, the basic interest rate of the Brazilian economy fell to historical lows, closing the year at 4.5%. The drop in the interest rates opened an opportunity for indebted companies to amortize their old debts contracted at higher interest rates and exchange them for new debt at lower interest rates. Investment in fixed assets, in turn, has fallen successively since 2013. This behavior, combined with the increase in the amortized volume over the years, characterizes the conservative behavior on the part of non-financial companies, indicating that expectations have not been restored since the 2015–2016 recession. In times when expectations are low, supply side policies, such as reducing interest ratesFootnote 26 and tax exemptions, prove to be ineffective in promoting the resumption of private investment. The interpretation of the results presented in this paper aligns with the conclusion of report no. 999 from IEDIFootnote 27 (2020):
With operating profitability contracting, the continuation of the trajectory of expansion of net profit margins reflected, in good measure, the process of renegotiating debts and improving the structure of liabilities (...) The impact of the reduction in interest rates had effect not only on the restructuring of long-term debt, but also on the reduction of working capital costs and other short-term financial expenses. Although the reduction in financial costs also has a positive impact on the opportunity cost of investments, the low demand and the stagnation of profitability at lower levels have been shown to be more relevant factors in investment decisions (free translation).
Another relevant nuance of the interpretation is that, as expectations about the growth prospects of the economy are low, non-financial firms seek refuge in financial applications to sustain their profit, instead of investing in long-term productive investments.Footnote 28 On this subject, Feijo et al. (2016) point out that the dynamics of economic policy in Brazil have not favored long-term investment decisions and, thus, support a vicious cycle of low growth.
According to Stockhammer (2004), the loss of investment priority compared to financial commitments is widely consolidated in the literature on financialization from two main axes: the crowding out effect of productive investment in favor of financial capital accumulation and the orientation of maximizing shareholder value (MSV). The theory of maximizing shareholder value finds that this same mechanism of priorities may also imply the sacrifice of productive investments in order to distribute dividends to the shareholders. Graph 7 allows us to analyze the behavior of firms’ productive investment in comparison to the volume of dividends distributed.Footnote 29
It is worth noting that both variables suffered a shock in the 2015–2016 recession, while only the volume of dividends paid has resumed its growth trajectory. Although the proportion of dividends distributed by companies shows an upward trend in relation to productive investment, the data does not provide enough evidence to corroborate or not the strategy of maximizing shareholder value.Footnote 30 The variation in the dividend’s payment is small, while the investment variable takes all the action. Such behavior reinforces the thesis of a defensive and conservative behavior on the part of companies.
In short, it is understood that the dynamics of financialized economies have made financial and economic crises not only more recurrent, but also deeper. Epstein (2005)Footnote 31 offers a broad definition of financialization, where financial links among economic agents are intensified and the degree of overall indebtedness increased. We may suggest that the increased dependence on finance turns the balance sheet of economic agents more fragile in a monetary economy. One consequence is that the recovery of the economy might be slower, given the lower weight of operating income in the composition of firms’ revenues and the diverse range of financial assets available, causing the crowding out of productive investment. In short, due to the pro-cyclical and dysfunctional nature of financialization, there is great difficulty in restoring the state of expectations of agents who, when faced with supply side stimuli, prefer to revise their balance sheets and profits, restructuring their debt profile. The response of Brazilian economic policy has been, since 2015, to cut public spending and adopt a fiscal austerity policy agenda. This means it has gone in the opposite direction of sustaining aggregate demand to anchor the expectations of agents in order to stimulate productive investment and, ultimately, promote economic growth.