Multi-Billion Dollar Brazil Business Subsidies Face the Chop

(Bloomberg) -- Brazil’s central bank chief is facing the tough reality that weaning the country’s largest businesses off of multi-billion dollar subsidies is easier said than done.

Over the past fortnight, Ilan Goldfajn has lobbied dozens of lawmakers over legislation that would essentially eliminate below-market rates on long-term loans from state bank BNDES before the proposal expires on Sept. 7. In a sign of the importance the central bank places in the bill, no fewer than four directors attended its reading in a congressional committee hearing on Wednesday.

The TLP, as the new rate is called, aims to end the days when BNDES’s subsidized lending flooded the market with cheap money, undercutting the effectiveness of monetary policy and often requiring additional benchmark rate hikes to soak up liquidity. Critics, including opposition legislators and some companies, say the new rules would squeeze corporate financing and frustrate the economic recovery. But rumors the government was abandoning the bill sparked a sell-off of assets last week, indicating how much investors back the proposal.

"The TLP strengthens monetary policy, reinforces the fall in the economy’s structural interest rates, incentivizes long-term private financing and capital markets," Goldfajn said in a speech on Aug. 11. The measure will also help save treasury resources, he added.

President Michel Temer’s administration has attempted to reduce the role of BNDES, which came to disburse more funds than the World Bank at interest rates several percentage points below the benchmark level. Beneficiaries of the cheap loans included JBS, the world’s largest meat-packer, and Oi, the telecoms company which filed for the biggest bankruptcy protection in Brazil’s history last year.

Aside from fueling inflation, the subsidies cost public coffers a jaw-dropping 240 billion reais ($75 billion) over the past decade, according to Betinho Gomes, a lawmaker in charge of shepherding the measure through Congress.

If approved, the bill would prompt Brazil’s currency to rally as markets would perceive that Temer’s reform agenda is advancing, Morgan Stanley analysts wrote in a report on Wednesday. The TLP is important because it would allow the benchmark interest rate to be lowered further as subsidies gradually vanish, they wrote.

With the bulk of the BNDES’s credit portfolio currently benefiting a small number of large-scale companies, the legislative proposal would essentially end perks for a privileged few, lower house chief Rodrigo Maia told reporters on Tuesday.

"We’ll create more justice in the Brazilian financial market," Maia said. In addition, authorization for any other preferential financing such as for the domestic ship building fund, must now come from Congress not the government.

“The bill empowers Congress while at the same time reducing the cost of credit and increasing competition in the loan market,” said Isaac Sidney Menezes, central bank director of institutional relations, in an interview at his office in Brasilia. “We are receiving good feedback from lawmakers after explaining the importance of the measure."

Detractors, including the influential Sao Paulo industry group Fiesp, argue that the change would reduce investment at a critical moment for the Brazilian economy. Workers’ Party Senator Lindbergh Farias, the head of the committee analyzing the proposal, described the measure as "absurd" and delayed the reading of the bill scheduled for last week.

The legislation is now expected to be read in Congress on Wednesday and would have to be voted in August to give the Senate sufficient time to approve it before the Sept. 7 deadline.

The day before, the central bank directors will meet for their next rate decision. In the light of worsening fiscal performance approval of the TLP credit rate bill could allow directors to continue at the current pace of cuts, extending the easing cycle to 600 basis points, the largest in a decade.

The bill "could be the project that allows this pace of cutting," said Andre Perfeito, chief economist at Sao Paulo-based brokerage Gradual Cctvm.

To contact the reporters on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net, Matthew Malinowski in Brasilia at mmalinowski@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Raymond Colitt, Bruce Douglas