BRAZIL-An interesting challenge

Is it possible?

Finance Minister Nelson Barbosa faces a rather difficult task. The administration has announced that it will make low-interest-rate loans to jump-start the economy. Barbosa indicated that he is thinking in terms of the long-term rate charged by the BNDES (5%-6%). The current Central Bank base rate (SELIC) is 14.25%. In the case of the BNDES long-term rate, the National Treasury “equalizes” (i.e. subsidizes) the rate to the banks lending at the long-term rate. 

However, Barbosa has stated that the proposed program to reactivate the economy will not involve subsidies. That means the BNDES will take the difference “on the chin”? The same will apply to Caixa Economica and Banco do Brasil?

Barbosa wants to get his program “locked in” before departing for the World Economic Forum meeting in Davos, scheduled to begin on the 20^th. Barbosa will present his program to the Forum on Friday 22 January.

How he intends to persuade Brazil's public banks to operate at lower-than-market rates with no equalization via the Treasury is not terribly clear. All three public banks already have profitability issues. Profits will worsen if the banks have to absorb lower-than-market rates and the government depends on the dividend payments from those institutions.

For sure, he will not convince the private banks to join this particular parade.

It will at least be interesting to see how the administration plans to resolve this issue without resorting to the same creative accounting applied in 2014.

It also remains to be seen if the low-interest loans will actually stimulate production and investment. At the very least they will allow companies to retire expensive debt with cheaper debt.

This movie has played before in Brazil.