Half of credit operations in Brazil don't obey the base rate (Selic) and therefore are not subject to the Central Bank's monetary policy. These rates only affect free credit.
This means that an important share of portfolios at state-run banks is out of reach for the decisions of the Monetary Policy Committee (Copom). They are guided by fixed rates set by the Monetary Policy Council (CMN).
The result of this model is that to fight inflation with the interest rate, according to the inflation targeting regime, the Central Bank has to double its efforts. And who pays the bill for the high rates are those without access to the BNDES, farm credit from Banco do Brasil or housing loans from Caixa Econômica Federal.
Without understanding this anomaly and its effect on demand, there is no way to seriously discuss the reasons why interest rates in Brazil are much higher than in the rest of the world. Since the Selic affects only half of credit, its level has to be much higher than reasonable to contain inflationary pressures. One of the main channels through which the interest-rate lowers demand and fights inflation is credit.
From the overall balance of credit operations in August, of R$2.9 trillion or 56.8% of GDP, R$1.5 trillion corresponds to free-resources operations and R$1.3 trillion come from directed credit. These are the most recent Central Bank data on credit. The share of free resources in credit is 53.1%, while the mandatory or directed credit holds 46.5%.
In the first group are clients, individuals and companies that borrow from money raised by banks in the market. They pay an average annual rate of 32.2% and the spread – the difference between what banks pay investors for the money and what they charge from borrowers – is 11.2%.
In the second group are companies and individuals with access to the BNDES, farm credit and housing program Minha Casa, Minha Vida. They pay an average annual rate of 8%, with a spread of 2.8%.
It must be underlined that 41% of directed credit comes from Brazilian Development Bank (BNDES) loans; 35% is for real-estate and farm participates with 15%.
Directed credit comes from fiscal and parafiscal sources (Workers' Severance Fund, FTGS, and Workers' Support Fund, FAT), savings deposits (which finance housing) and spot deposits (for farming).
Before financed primarily by the FAT, the BNDES gained clout with capital from National Treasury bonds, which especially since 2009 has transferred R$451 billion to the development bank. Another R$5 billion for the BNDES are being discussed in Congress, in an executive order, for this year.
The Treasury issues bonds under base rate Selic (11%) and the BNDES lends to companies based on the Long Term Interest Rate (TJLP) of 5%. The spread represents the Treasury subsidies, estimated at R$30 billion a year. Most of them are not included in the Budget of the Union, run outside of primary spending and cannot be influenced by Congress, which holds the task of discussing and approving the budget.
Half of credit operations in Brazil don't obey the base rate (Selic) and therefore are not subject to the Central Bank's monetary policy. These rates only affect free credit.
This means that an important share of portfolios at state-run banks is out of reach for the decisions of the Monetary Policy Committee (Copom). They are guided by fixed rates set by the Monetary Policy Council (CMN).
The result of this model is that to fight inflation with the interest rate, according to the inflation targeting regime, the Central Bank has to double its efforts. And who pays the bill for the high rates are those without access to the BNDES, farm credit from Banco do Brasil or housing loans from Caixa Econômica Federal.
Without understanding this anomaly and its effect on demand, there is no way to seriously discuss the reasons why interest rates in Brazil are much higher than in the rest of the world. Since the Selic affects only half of credit, its level has to be much higher than reasonable to contain inflationary pressures. One of the main channels through which the interest-rate lowers demand and fights inflation is credit.
To obtain an idea of the expansion of public credit, the lending balance of state-run banks corresponded to 21.4% of GDP in 2011, the first year of the Dilma Rousseff government. In August 2014 the percentage had risen to 30.1% of GDP. The opposite happened at privately-owned banks: it was 27.7% of GDP in 2011 and fell to 26.7% of GDP this year.
In the first round of the electoral campaign, much was said about the exorbitance of rates and the profits of banks in Brazil. What was not mentioned is that the issue is much more complex than powerful phrases during campaign debates: and also, that the government has an important share of responsibility for the very high cost of capital that penalizes companies and Brazilian consumers.
The size of the Selic, therefore, is intimately linked to the TJLP, frozen at 5% a year since January 2013.
The next president won't escape having to make a decision to lower the volume of credit subsidies and there are clear signs already that this will happen.
The abundance of subsidized financing from the BNDES for some companies didn't increase the economy's investment rate, which fell to only 16.5% of GDP in the second quarter, nor produced competitive companies abroad, the “national champions” the government wanted to encourage.
On the site of Aécio Neves, the Brazilian Social Democracy Party (PSDB) candidate, the position is clear in his government program and in the statements economist Armínio Fraga, already picked for Finance minister if he wins the election.
The proposal is imposing strict criteria for subsidized loans, as long as justifiable by their distributive impacts or if the social return surpasses the private-sector one. In Mr. Fraga's view, the plentiful distribution of subsidies for companies is regressive from the income distribution standpoint.
Economist Nelson Barbosa, former secretary of Economic Policy at the Finance Ministry, also devised a proposal for a potential second term of the Workers' Party (PT), if Ms. Rousseff wins re-election. He advocates a gradual expansion of the TJLP to the expected growth rate of nominal GDP in the next four years. The long-term rate would converge in two years to the nominal GDP growth rate estimated for the 2015 to 2018 period, of around 8% according to market forecasts.
To build a new economic policy that preserves fiscal stability and the public sector's solvency, the next government will have to attack both the imbalances between primary revenues and expenses and the financial budget, inflated on the last four years by a National Treasury management that tried to solve all public demands with new debt.
Lowering the carrying costs of Treasury loans to state-owned
banks and recover the government's ability to generate primary surpluses
are two relevant measures for the future decline of the Selic rate.
With growth, the task will be much easier.
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Oct 10 2014
