Brazilian government to press ahead with reform of TJLP

The Brazilian government is resisting pressure to reconsider its proposal to change how BNDES, the state development bank, charges interest rates to lenders.

The government has written a bill that will phase out the current long-term TJLP rate – which is set by committee and is currently 7%, below the country’s Selic base rate of 10.25% – and replace it with a new TLP rate, which will be linked to the yield on inflation-indexed government debt.

However, in a recent interview with local financial newspaper Valor, Paulo Rabello de Castro, the new chief executive officer of BNDES, suggested the TLP rate could instead be linked to the consumer price index. Two senior BNDES vice-presidents resigned after Rabello’s comments about possible changes to the new TLP rate were reported, showing the sensitivity in Brazil about the new financing rate.

There has also been an uptick in local criticism about the changes, with trade associations beginning to lobby against the changes. For example, José Velloso, chief executive of the Brazilian Machinery Builders’ Association (Abimaq), said the changes to TJLP would increase the cost of long-term funding.

According to local media reports, he said: “The new TLP will make the cost much greater than in other countries, taking the competitiveness of the industry, of buyers of capital goods.”

However, finance minister Henrique Meirelles and planning minister Dyogo Oliveira were both quoted by Reuters this week as dismissing any changes to the calculation of the new BNDES lending rate. This steadfastness is due to the fact that this change is a key part of the government’s reform programme for the financial sector – and is backed by Ilan Goldfajn, the central bank’s president.

A report from the World Bank earlier this year, titled Brazil Financial Intermediation Costs and Credit Allocation, highlights the negative impact on fiscal and monetary policy of the current TJLP rates.

According to the report, the TJLP rate in Brazil is responsible for 72% of all “earmarked” lending. Earmarked lending is credit extended by the government at subsidized, below-market rates. At the end of 2015, half of total credit in Brazil was earmarked, which was back to the levels seen in the late 1990s after it had fallen to one-third of total credit in 2007, just before the financial crisis hit.

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