IN 2009, as Brazil was buffeted by the global financial crisis, its president, Luiz Inácio Lula da Silva, was seething. The mess, he complained, was the fault of “blue-eyed white people, who previously seemed to know everything, and now demonstrate they know nothing at all”. For him the crisis was a repudiation of Anglo-Saxon liberalism and a vindication of state capitalism. Like many countries, Brazil cut interest rates and increased spending. Unlike many other governments, however, Brazil’s used its state development bank, BNDES, to funnel subsidised credit to Brazil’s largest companies. Thanks to cheap loans from the Treasury, the bank doubled its lending, which reached a peak of 4.3% of GDP in 2010. For most loans the interest rates were half the level of Selic, the central bank’s benchmark.
The plan worked, for a while. Brazil emerged from the crisis relatively unscathed: after a short recession in 2009 the economy rebounded with GDP growth of 7.5% in 2010. But the stimulus outlived the recovery, at an increasing cost to the taxpayer. Between 2009 and 2016 subsidies from the Treasury to BNDES totalled 116bn reais ($48bn). Brazil’s big firms became hooked on cheap credit. Some have faced allegations that they obtained the loans fraudulently. One, a meatpacking firm called JBS, borrowed 8.1bn reais from BNDES; it went on a spending spree, buying meat producers in America, Australia and Europe, and became the world’s largest meatpacker. BNDES ballooned, too. It now accounts for 15% of total lending to the private sector; its balance-sheet is as big as the World Bank’s.
But times have changed. Brazil is emerging only slowly from its worst-ever recession, having lost its status as an investment-grade sovereign borrower in 2015. Its public finances are enfeebled: last year it recorded a gross fiscal deficit (ie, including debt service) of 8.9% of GDP. Government subsidies are on the chopping block. BNDES currently lends at a small margin over the cost of its funds from the Treasury—a rate called the TJLP, which is set low by the National Monetary Council, a body composed of the central-bank governor and the finance and planning ministers. In September Brazil’s Congress decided to replace this rate with a new one, known as the TLP, which will be set monthly by the central bank and indexed to five-year government bonds. The new rate will be introduced on January 1st and will be phased in over five years. This could save Brazil’s Treasury 0.25% of GDP a year, predicts Neil Shearing of Capital Economics, a research firm.
Not everyone is cheering. BNDES’s customers complain that their cost of capital will go up, threatening jobs. Raising the interest rate is also likely to reduce BNDES’s market share and so squeeze its profits, warns Moody’s, a ratings agency. But the reform has been welcomed by small and medium-sized firms. Brazil’s central bank is currently forced to set Selic at an artificially high level to offset the impact of BNDES’s subsidised rate on the wider economy. By “making all credit in the economy sensitive to the central bank”, monetary policy will become more effective, argues Arthur Carvalho of Morgan Stanley. So borrowing costs should come down for companies too small to tap BNDES (the bank does not currently offer loans of less than 20m reais).
The reform is an important advance in Brazil’s government’s efforts to bring public spending and the fiscal deficit under control. But it does not go nearly far enough in reducing the deficit. The country’s overgenerous, unaffordable pension system costs 13% of GDP. Without reform, public spending on pensions could reach a fifth of GDP by 2060, when the number of over-65s is projected to increase from 17m now to 58m. Hopes that a pension reform could pass Congress were high until May, when Michel Temer, Brazil’s president, became embroiled in a corruption scandal. Efforts to revive it have so far come to naught. Reforming BNDES is overdue. But it will take even more belt-tightening to put the country on a firm financial footing.