COVID-19 and Global Valuation Impacts: Spotlight on Argentina & Brazil

The member firms of Valuation Research Group (VRG), the global professional valuation arm of VRC, offer a unique perspective of their economies and markets as they’ve been feeling the impacts of the coronavirus.

Watch the third recorded replay of our three webcast sessions featuring a spotlight on pandemic-related market developments in Argentina and Brazil.

Moderator: PJ Patel, Co-CEO | VRC

VRG Argentina: Rodolfo Biasca

VRG Brazil: Luis de Carvalho

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Video Chapters:
0:00 – 1:55 Session and panelist introductions

1:55 – 11:54 Economic and market impacts

11:55 – 14:02 COVID-19 Social Impacts, estimated returns to a state of “normalcy”/lifting work/travel restrictions

14:02 – 31:45 Valuation Impacts (Impairments, Solvency, etc.)

31:46 – 39:52 Final panelist thoughts on the impacts of COVID-19

39:53 – 40:18 Closing


Session Introduction and Panelist Introductions

[Jennifer Dries, Marketing Director | VRG U.S. (VRC):] Hello, and thank you for joining us. I’m Jennifer Dries, marketing director with VRG. We thank you for tuning in with VRG leadership, PJ Patel, Rodolfo Biasca, and Luís de Carvalho. They will address valuation impacts as a result of the coronavirus pandemic. We hope this provides you with the educational information you’re looking for to find certainty in a time that we all feel is quite uncertain. PJ, I’ll pass the floor to you.

[PJ Patel, Co-CEO | VRG U.S. (VRC):] Thanks, Jen. I’m PJ Patel, co-CEO of VRC, and based in New York. I’ll be talking with some of my colleagues from Valuation Research Group around the world about the impact of coronavirus in their individual countries. Luís, can you give a little background on yourself as an introduction?

[Luís de Carvalho, Partner | VRG Brazil (Setape)] Well, I am a Partner of Setape, which is the Brazilian affiliate of VRG. We do mostly valuations of PP&E and economic valuations. And I’m the head of the economic valuation in Brazil.

[PJ:] Thank you, Luís. Rodolfo, can you give a bit of background on yourself as well?

[Rodolfo Biasca, President | VRG Argentina (R. Biasca & Asociados):] Yes, I am Rodolfo Biasca. I am the president of Biasca & Associates in Argentina. We have been in the Valuation Research Group from the very beginning, and we provide advice in valuations, mergers and acquisitions, and financial matters.

[PJ:] Thank you, Rodolfo.

Economic and Market Impacts

[PJ:] So let’s start in talking about the impact of coronavirus in your markets. You know, here in the U.S., we’ve obviously seen a very significant impact on the stock market, although over the last week or so, we’ve also seen some signs of recovery.

So, Rodolfo, can you touch on what you’re seeing in Argentina?

Argentina Economic and Market Update

[Rodolfo:] Well, in Argentina, the situation is quite complex because the country was following an IMF program of study during 2018 and 2019. And GDP was negative.

So the country was in a recession. At the end of 2019, there were general elections, and a new government took charge at the beginning of the year. So, the first reaction of the new government was price controls: “Let us freeze the situation and think what is going to…what we are going to do in the future,” and the virus came.

So the GDP forecast from the World Bank today is -5.2 percent for this year. On the other hand, Argentina has had debt, external debt during the last years. And from the practical point of view, it is impossible to pay those debts in the short run.

And if you read the Financial Times, the English newspaper of today, April 13, you’re going to see an article in page four talking about Argentina default. And that is the reality. The country is in default. The country risk has increased to the sky. It was 500 points in October 2018, it was 600 points in July 2019, and today is more than 3,000. And Argentine bonds in the stock exchange trade at 25 cents or 30 cents for a dollar. So, consequently, there are no investments. On the other hand, the only big project that was shale oil in Vaca Muerta, huge reserve of shale oil, is now impacted by the low price of the oil.

So that is the situation in Argentina: recession, high unemployment, lack of investment, nobody trusting the government because this is the ninth default in Argentine history. So, it is considered not…for the moment, not a reliable country for investments.

Argentina COVID-19 Impacts

[PJ:] Interesting, Rodolfo. Sounds like a lot of moving pieces there. Maybe just to level set the discussion, have there been many coronavirus cases in Argentina? And part B of that question is, it sounds like the economy wasn’t doing great prior to this, is there any further impact as a result of coronavirus?

[Rodolfo:] Well, the virus has arrived late. And the first decisions were taken during March, and people has to stay at home until April the 26. And the borders are sealed. And there are a lot of decisions from the government to stimulate the economy, to help the poor, and so on, that are very similar to what is being done in other countries. So, just to give you an idea, only 25 percent of the workers in the manufacturing industry are going to work.

Fortunately, Argentina has a strong agricultural sector, and the agricultural sector is still producing and exporting.

Brazil Economic and Market Impacts

[PJ:] Got it. Okay. Luís, how are things in Brazil? First of all, do you have any [inaudible], and then, you know, what’s the impact been on the economy?

[Luís:] We have… I was trying to find an updated number. Here we have some tens of thousands of cases all over Brazil and about 1200 deaths so far.

It’s not passing us by, by any means. So, we prepared this just to show what’s happening. This is the stock market in Brazil. It was sort of going fairly well until 20th February. Then it dropped quite dramatic until 20th March, and then sort of got somewhat stable here.

We had a 38 percent drop in that period. Okay? And the volatility sort of went haywire in that period between 20th February and 20th March. But it’s still very volatile, although it’s sort of not going down consistently and is still very volatile.

GDP growth, it had been 1.3 percent in 2017 and 2018, and 1.1 percent in 2019. And predicted growth, before the crisis, for this year was going to be 2.5 percent to 3 percent. The Ministry of Economy is forecasting zero, and the World Bank is forecasting -5.0, -4.6 for the whole of Latin America.

And they think there will be a growth of 1.5 in 2021 but from a much lower basis. So, I think things are going to be…it will hit as hard. It’s all early days, in fact, but I think things will hit as hard for a long time.

We have a publication called the Focus Report that’s published by the Central Bank every week, where they gather microeconomic projections from 400 different sources: universities, foundations, banks, etc. And they sort of hover that somehow, I don’t know how they create it statistically.

And this is their GDP growth projection. So, it was 2.23 until February 14th, then it started going down, down, down, and down. And then the last one on 3rd April was 1.18, negative. So, everybody is in agreement that we’ll have a negative GDP this year. Unemployment was already high before.

It was 13 percent in 2020. I think it’s in the early days to make any sort of prediction, but it will go considerably up, I’m sure of that. The exchange rate, it did go haywire here. And we were on a sort of a 4-something here react to the dollar. 420, I would say.

Now we’re 520. The average of 2019 was 395. And the growth after February 20 has been 19 percent. Exporting companies are doing very well, thank you. And the rest of the economy is doing very poorly. One thing that is mitigating all that is that oil is very cheap.

We are on the importing side, so we like that. So in terms of the economy, that’s what I have.

Brazil COVID-19 Impacts

[PJ:] Yeah, very interesting, Luís. Maybe, you know, given the timing of the virus in Latin America, do you have any thoughts in terms of when you can expect to get back to sort of a normal situation or at least get back to work? I know it’s highly uncertain.

[Luís:] Well, I think we must be…I mean, in terms of curves, we must be about two weeks behind the average American curve.

[PJ:] Okay.

[Luís:] New York apart. I mean, we are still climbing, but I don’t think climbing so fast anymore. But like the United States, it’s a very diverse culture, and Brazil is as big as them. In fact, Brazil is bigger than 40 states in the U.S. So we don’t have a pattern.

I mean, things happen differently in different places. Rural areas are less affected, but Sao Paulo is the worst place as much as New York is the worst place in the United States. But that’s what has been happening.

[PJ:] Got it. Yeah. Rodolfo, how about Argentina? Similar, I would imagine.

[Rodolfo:] Yes, I have already mentioned that people have to stay at home, circulation is limited, and the country is sealed. So those instructions are in place in order to limit the influence of the virus. But we really don’t know what is going to happen because day after day, the number of deaths and infections are increasing.

Valuation Impacts in Argentina

[PJ:] Got it. And, Rodolfo, I know there are a lot of moving pieces in Argentina and impact of many items beyond the coronavirus. But what are you seeing on the valuation side? You know, I would say just, again, looking at the stock market as a proxy in the U.S., you know, the stock market was down 30 percent.

Today, it’s down, maybe, 20 percent from where it was at its peak. Where’s the market in Argentina, and what sort of valuation issues are you seeing?

[Rodolfo:] Well, the first valuation issue is inflation. Inflation was 55 percent last year. And during this year, there are several forecasts speaking about 40 percent, but I don’t believe in those forecasts because the country has no access to external financing.

And consequently, the government has already said that they are going to print money. So the only tool that they have to pay expenses which is just increasing the monetary supply. And as Nobel Prize Milton Friedman said in the past, “Inflation is the only tax that is not approved by the Congress.” Tax pressure in Argentina is incredible. Even the exports have taxes.

Consequently, from the valuation point of view, the first issue is inflation. The second issue is when somebody is asking you which is the value of this widget in U.S. dollars? Well, the exchange rate is controlled. And at the present moment, there are four exchange rates: there is one exchange rate for export and imports, there is another one for tourists and credit card payments and there is the black market. And finally, there is something that is used by big corporations when they want to make dollars transactions.

And finally, the difference with last year is that last year the exchange rate was around 40 pesos per dollar. And now, 12 months later, is around 90.

The third issue from the valuation point of view is cost of capital. This is an interesting point from the intellectual point of view. And it is not new. There is a Harvard University case published in 2016 when Dow Chemical bought a petrochemical plant that was sold by the government.

[Luís:] In Argentina?

[Rodolfo:] Yes. I have the number of the case, is 9-204021. And there is an interesting discussion about what is the cost of capital that you are going to choose in a country like that with uncertainty in the future and with political turmoil from time to time?

So, at the present moment, if we are talking about doing some cash flows for impairment calculations, first, we have to choose a realistic cash flow. Then the second point is, “what are we going to use as a discount rate, as the cost of capital?” And I foresee, in the future, that the price of every asset in Argentina are going to go down. But again, there is so much uncertainty from the political, economic, and the virus point of view that this is going to affect our valuations.

And my final comment is Argentina has a lot of small business. And some of these small businesses are not going to survive this crisis. Consequently, from our advising services, we foresee a lot of mergers, acquisitions, companies doing restructurings, and changing their strategy.

I don’t know if I have answered your question.

[PJ:] Yes. That is helpful, Rodolfo. So I would say here, you know, over the last several weeks, I think there’s been lots of discussion around impairment issues on the financial reporting side. And although we would talk about many of the similar items that you’re talking about in terms of small businesses, insolvency, and things of that sort, we haven’t seen necessarily phone calls relating to that as yet.

I would also say that, you know, the issue of what the appropriate discount rate is, maybe a slightly different discussion, but yet, we’re having a similar discussion in terms of what is the right equity risk premium in the U.S.? And so, I guess, some similarities, although, you know, in many ways, on a different scale.

Do you see any issues around impairment testing or any other kinds of work in Argentina right now?

[Rodolfo:] No.

[PJ:] No? Okay.

[Rodolfo:] No. I think everything is so new that people are more concerned about the decisions that the government is producing. The government, the Congress is practically not working. And all the decisions, because of the emergency, are created by the President. And the President has issued around 20 decrees or decisions during the last month.

Some of those decisions have not even been implemented. Everything related to accounting is explained and decided by the local Internal Revenue Service in Argentina. And some of the decisions are still not formalized. Consequently, from the accounting point of view, there is also some uncertainty in the future.

Valuation Impacts in Brazil

[PJ:] Okay, interesting. Luís, how about in Brazil? What are you seeing? Are there valuation issues that companies are struggling with right now as a result of coronavirus?

[Luís:] Internal regulatory issues. CVM, which is the Brazilian equivalent of the SEC, hasn’t issued anything so far. Audit firms are pushing for more rigorous impairment tests. In fact, I’m a board member here in Brazil, and I was discussing with the CFO last week whether we would have the need of any impairment testing in the smaller units of the company.

And he said that Ernst & Young, which is the company’s auditors, is making companies that haven’t published the ’19 accounts yet to do impairment tests on the basis of 31st December, which I don’t understand because, I mean, there wasn’t an issue on 31st of December, but there is a subsequent event. So, they are pushing for that. I think we’ll hear a lot from the auditors in the near future.

The general issues we are dealing with are bank collateral, especially for those companies that have foreign currency loans. The collateral they offer is insufficient, and the bank is sort of asking for additional collateral. And so, banks are doing a lot of valuation in that respect.

I think we’ll have a problem with covenants. And then each contract is a different contract, but I think many covenants will not be met, and that will sort of complicate the issues quite a lot.

And fund valuation is another subject. I mean, both equity funds and debt funds, I mean, everything’s going haywire. So, this is the sort of thing that we are receiving inquiries about, is impairment and these issues here.

[PJ:] Got it.

General Worldwide Valuation Impacts

[Luís:] What I’ve been looking at…I mean, what I was hoping you would give me the answers on PJ, were methodological issues. I think that market-based valuations will become very questionable because I think the stock market reflects the non-controlling holdings. And those are the guys that get desperate more quickly. So, I mean, “our company is getting cheaper,” and the guys that have the control are going to have advantage after that. I mean, I have to study that a little better. I don’t know what’s happening here.

[PJ:]  Luís, I can touch on these issues. I would say that, depending on what you’re looking at, one of the things we have seen is a movement to more of an averaging of the stock price over some period of time—two or three weeks—so, if we’re doing impairment testing as of 3/31, we’re not necessarily just looking at the stock price as of 3/31.

We’re looking at the stock price, you know, let’s say over two or three weeks to get some sort of average. Now that number is still below where it was at at its peak, but I think you’re no longer subject to the daily fluctuations that happened through that time period.

[Luís:] Okay. Well, these are the issues. I mean, each case is a different case, and we have to look with great care. But I think we’ll be doing more DCF, and financial markets will become much more complex. I’ve been watching webinars from ASA, from IIBV, etc., and I think we’ll be using different scenarios and then weighing different scenarios, or using Monte Carlo, or something like that. And I think the documentation will have to be more detailed, and more complex, and God protect us from the auditors because I think it’s going to be a difficult time.

I mean, the fact of the question is, this is a disruptive moment. And in a disruptive moment, history is of very little benefit. And when you try and get guidance in terms of the future, even in places like the U.S., I mean, you have the president wanting to open business and most of the states wanting to keep them closed up. What scenario do you plan on that? I mean, it’s very difficult to even create a scenario, let alone make projections out of that scenario.

[PJ:] Yes. That’s a really good point. And I think, you know, especially as we move into the second quarter, I think that’s one of the items that I think we’re more likely to see. In the first quarter…at the end of the first quarter, we did not see companies looking at multiple scenarios because the impact of this was so new in the U.S. But as we move into the second quarter, and as this plays out, I think that we’re going to see companies looking at scenario A, B, C, D, E, and beyond.

[Luís:] Yes. But then again, you have five different scenarios. What do you do when you…do you weigh them out 20 percent each or? Your answer to your client will be a range rather than a number. I mean, this is the sort of thing that’s new for us.

[PJ:] What are the other items, Luís? You touched on this is control versus non-control. We did an article recently, we studied control premium data going back 25 years and looked to see what sort of control premiums are shown in the market when the market is strong, when the market is weak.

And very clearly, what you can see is in a softer market, or in a bear market, like we have today, control premiums increase. And in a stronger market, control premiums decrease.

[Luís:] Just one question, in terms of impairment, of course, the first and foremost with everybody is goodwill impairment. According to IFRS, if you…I don’t know if it is like that in the states, but if you impair goodwill, you can never recover it, it’s forever. Okay, so this worries me. But what about impairment of other indefinite-lived assets? I mean, are you sort of doing them as well? I mean, are they under fire as well?

[PJ:] They are, yes. No, I think indefinite-lived assets are definitely, you know, subject to testing, and we’re likely to see some of that in Q2. I think that long-lived assets, though, are…you know, because of the way the testing for that works in the U.S., I don’t think we’ll see that as much based on current conditions.

But, you know, if the impact of coronavirus is more long term, then you could see some impact of long-lived impairment testing as well.

[Luís:] Okay.

Final Panelist Thoughts on COVID-19 Impacts

[PJ:] Yes. Any final thoughts, Luís, on the impact of coronavirus on Brazil and what you see going forward?

[Luís:] Well, I see in the whole world, not only Brazil, is… I mean, if I were the president of any country, I would probably make every effort to save lives. People are spending everything they can, and at the same time, tax revenue for the government is going to be much less there. That means that in the very near future, there will be a huge bill to be paid. And, I mean, we didn’t know the size of that bill. We don’t know what application of a bill that big will have on the continuing of business, on tax levels, and on employment, on growth. So, making projections now is very complex because governments don’t know what to do, nobody knows the total size of the bill. And, I mean, we are up to some very nice surprises in the next two or three years, I think.

[PJ:] Yes. Rodolfo, how about yourself? What are you seeing in Argentina? Final thoughts?

[Rodolfo:] In a certain way, I agree with Luís. We have published, last Friday, on our website,, an article for the companies analyzing the present situation and suggesting some strategy. But again, although uncertainty is very high, we are seeing a huge impact in three areas: the government, the companies, and the consumer—the individuals. In the case of the Argentine government, we see that there is an increasing role of the government. The government just making decisions in every certain, in every aspect of life, in every aspect of business. And well, that is justified by the crisis, but it is a bit dangerous.

In the case of Argentina, we are concerned about inflation because inflation has always been a disease in that country. And with now the decision to print money freely, we don’t know what is going to happen. Inflation, it’s not only a tax, but it’s a way to distribute wealth between different sectors. And depending if you are a winner or a loser, that is something important. On the other hand, the country has reached the limit in taxes—they don’t know what they are going to tax in the future. The federal and the local taxes are so high now that it is not possible to increase them substantially. So that is going to produce another problem.

From the companies’ point of view, most companies are going to change their strategy. And on the other hand, the crisis has produced a sort of notice to the companies that they have to improve their technology. Because now they realize that they have to use more internet, that they have to make a digital transformation inside, even if they are small companies. Again, in order to guide that process, we have begun with that article that I have already mentioned, and we are going to produce another one related to cost of capital and financial decisions, etc.

From the consumers’ perspective, this is also very interesting. Because suppose that you are in a company that doesn’t have cash flow problems, that is still selling, and you still have a certain budget for marketing. Well, some consumers do not like to hear some promotions because they are more concerned about necessities, they are more concerned about their jobs. And consequently, as a manager, you have to change your perspective in the marketing tools. So, from the individual point of view, what we see in Argentina is people are more concerned in the near future, in their necessities. Their lives have changed because they have to stay at home. So, they are studying online, they are buying online, and they are reflecting about the role of the government, the companies, and their own activities.

So, to summarize, I think that the coronavirus is going to produce all the effects in the short run that we have discussed, but this is going to produce a long-term effect in our way of thinking.

[PJ:] Yes. Very interesting. And I think, you know, one of the things I would say has been surprising here is how, in the U.S., we were able to quickly mobilize and work from home and very quickly shift. I think that’s been a pleasant surprise in all of this.

[Luís:] I’m selling all my holdings in property funds because I think property will become redundant very quickly.

[PJ:] Okay.

[Luís:] Companies will discover that they don’t have to have all that space, you know, let people work from home.

[PJ:] Yes. Thank you, both, for your time. Very interesting to hear your thoughts and perspective.

[Luís:] Thank you.

[Rodolfo:] Thank you.

[Jennifer:]- Gentlemen, thank you so much for taking the time to speak with us today. For those of you watching, we welcome you to connect with any member of our panel and we encourage you to visit us online at Thank you.