The prevalence of variable or mixed rate loans (83% of the total) and fixed rate short-term loans (4%) results in that the increase in EURIBOR rates tends to be reflected with a short lag in Portuguese firms’ funding costs. It is possible to simulate the potential impact on interest rates applied to existing loans to non-financial corporations in the next 12 months, using the expectations implicit in money market instruments. The estimate should be interpreted as partial, as it does not consider how the increase in interest rates, or the macroeconomic context driving it, may affect other relevant variables for firms and their decision-making. 

Under the conditions of this exercise, interest costs would increase by about €1,188 million over the year ending in July 2023 compared to estimates for the year ending in July 2022, corresponding to an increase in the implicit interest rate of 1.58 p.p. This interest rate value is similar to that in July 2015. By assuming the same rate change for the overall interest expenses, which includes the cost of funding sources other than bank loans, it implies a cost increase corresponding to 5.3% of 2019 EBITDA. The interest to EBITDA ratio would stand between the values registered in 2015 and 2016. By sector of activity, of note are firms in construction and real estate activities (ratio of 9.1%), accommodation and food service activities (8.5%) and electricity, gas and water (7.9%), for which the ratio was already very high compared to the overall figure. This increase is also explained by the relatively higher debt-to-EBITDA ratio in these sectors. The debt-to-EBITDA ratio was also higher in micro firms vis-à-vis the other size classes, which resulted in a higher increase in the interest to EBITDA ratio (8.7%). 

For more details see Box 2 “The impact of the rise in interest rates on the cost of bank financing for firms”, published in the Economic Bulletin of Banco de Portugal, October 2022.

Prepared by António Santos. The analyses, opinions and findings expressed above represent the views of the author and not necessarily those of Banco de Portugal or the Eurosystem.

If you want to receive an e-mail whenever a new “Economics in a picture” is published send your request to info@bportugal.pt.