Higher interest rates in Brazil could make it more difficult for companies in the polymers chain to get long-term credit, according to the president of the largest distributor trade association in the sector, Adirplast, Laercio Goncalves.
Brazil's central bank increased the country's interest rates 75 basis points on March 17, raising the benchmark Selic rate from its all-time low of 2% a year to 2.75%. The move was prompted by inflation concerns in Brazil, but was criticized by industry representatives.
"We were able to get lower interest rates in banks during all the pandemic until now. A higher Selic will certainly affect us in the long-term," Goncalves said.
According to the central bank's statement, another 75 basis-point increase is expected for the next monetary policy meeting, scheduled to May 5. This was the first time the Brazilian central bank raised its key interest rate since 2015, the year former president Dilma Rousseff was impeached, and her successor Michel Temer started a reforming agenda to try to get the country out of a crisis.
Brazil's national industry confederation, or CNI, agreed with Adirplast.
"We think this decision should have been postponed until the effects of the isolation measures over the demand could be evaluated," CNI president Robson Braga de Andrade said in a statement.
Governors from all over the country are adopting new social distancing measures to try and contain the spread of COVID-19 cases. Brazil is the country with the second highest number of cases and deaths due to COVID-19, behind only the US, according to Johns Hopkins University data.
In the state of Sao Paulo, a petrochemicals hub, bars, restaurants, and other places considered non-essential, such as gyms and beauty parlors, are prohibited from opening. The industry in general, however, is allowed to operate.
"An interest rate increase is an additional measure of demand constraint, unnecessary in the current scenario," CNI said.
The interest rate hike is a move that can also work as a mechanism to attract foreign investors looking for bigger premiums, which could lower the exchange rate in Brazil. The Brazilian Real was one of the most devalued currencies in 2020, and the exchange rate is one of the variables considered in local polymers producer Braskem's price formula.
However, Gonçalves did not see this affecting domestic resins prices in the short term. He stressed that Braskem also uses international prices as a variable, and some are at a record high.
S&P Global Platts data showed that imported HDPE blowmolding and film grades are at a record high $1,800/mt, with LDPE at $2,100/mt, as assessed March 17. HDPE injection was assessed at $1,750/mt, still $15/mt below its September 2014 record. LLDPE is $35/mt below its September 2014 record, at $1,750/mt.
Gonçalves sees the exchange rate staying at a Real 5.60/$1 level for the rest of the year. The ideal rate would be below Real 5/$1, he added.
