During the depths of the financial crisis, Brazil began providing the nation’s most heavily discounted loans through state banks. Now, the program is being extended, deepening skepticism among bond investors the country has the wherewithal to rein in subsidized credit to avoid a downgrade.
The Treasury’s Program for Sustainable Investment, initially aimed at restoring growth, has lent 220 billion reais ($97 billion) since its start in 2009 and is now offering rates as low as 3.5 percent, versus 14.7 percent for company loans. Brazil’s borrowing costs in dollars have soared 1.65 percentage points this year to 5.11 percent, poised for the biggest annual increase in more than a decade, while the 11 percent loss for bondholders is almost twice the emerging-market average.
The initiative, which targets loans for machinery, vehicles and technology, will be prolonged into 2014 on a smaller scale than this year, Finance Minister Guido Mantega told reporters last month. Mantega is supporting the taxpayer-funded program even as he pledged to bring Treasury support for state development bank BNDES, Caixa Economica Federal and other public lenders to zero after Standard & Poor’s and Moody’s Investors Service cut their outlooks on Brazil’s credit rating.
“That conflict between actions and discourse is what leaves the market in doubt,” said Flavio Serrano, an economist at BES Investimento in Sao Paulo.
Press officials at BNDES and the Finance Ministry declined to comment on the program’s effect on Brazil’s credit rating.
Brazil’s Treasury has lent more than 440 billion reais to state banks since the financial crisis began in 2008 through the program, known as PSI, and other initiatives.
The stimulus will cost taxpayers 54 billion reais by 2014 in subsidies to pay for the below-market rates, according to reports from the Treasury and government auditors.
The loans have helped boost gross debt to 59 percent of gross domestic product from 55 percent at the start of last year. The ratio could have fallen to 50 percent were it not for the Treasury transfers since 2008 to BNDES alone, according to estimates in a Nov. 13 report by economists at Standard Chartered Plc.
PSI has been extended by the government at least six times amid faltering economic growth. BNDES said it released 49 billion reais under the program this year through July, already surpassing the 44 billion reais lent in all of 2012.
Gross domestic product will grow 2.5 percent this year and 2.1 percent in 2014, according to the median estimate of about 100 analysts surveyed weekly by the central bank. The economy grew 0.9 percent last year, down from 2.7 percent in 2011 and 7.5 percent in 2010.
The statistics agency reported today that consumer prices climbed 5.78 percent in the 12 months through mid-November, less than the median forecast of 5.87 percent from 24 economists surveyed by Bloomberg.
Brazil’s government deficit as a percentage of gross domestic product swelled to 3.3 percent in September, the largest in almost four years, the government reported Oct. 31. S&P may reduce the nation’s BBB credit rating if fiscal accounts worsen, Regina Nunes, a managing director at the company, said in an interview this month.
“That perception of higher risk of a downgrade is being priced in,” Vinicius Botelho, an economist at the Getulio Vargas Foundation research group, said in a phone interview from Rio de Janeiro. “The changes that the government should be preparing to avoid risk from worsening fiscal accounts have been a long time coming.”
Mantega said Nov. 1 that BNDES will reduce lending 20 percent next year to help shore up finances. The government also said it will unwind tax breaks on consumer goods. Mantega said he’s reviewing all spending, including an increase in outlays on unemployment benefits, which may reach 47 billion reais this year, or about 1 percent of GDP.
The government shouldn’t cut back on the PSI program, which has buoyed economic growth and tax collection, said Decio Carbonari, the president of Brazil’s association of auto financiers. The program includes financing for trucks and buses.
He said the stimulus measure was in line with quantitative easing by the Federal Reserve, which hasn’t been scaled back as policy makers wait for signs of economic growth to pick up.
“It’s the same logic here,” Carbonari, the president of Banco Volkswagen in Brazil, said in a telephone interview. “Those loans increase sales of cars, equipment, and support factories, which pay taxes. Many countries have those kinds of incentive programs.”
Government-controlled banks have boosted lending at five times the pace of privately run counterparts this year. Brazil’s central bank has raised its target lending rate to 9.50 percent from a record low 7.25 percent this year, the biggest increase among 49 nations tracked by Bloomberg, in a bid to cool consumer demand and hold down prices.
While Treasury loans to BNDES for the PSI program are contributing to the country’s worsening fiscal outlook, any changes that the bank makes in that policy will be measured, said Ernani Torres, a former head of research at the bank.
“The government is gradually going to reduce resources for BNDES because it wouldn’t be good if it just left BNDES without money for its commitments,” said Torres, who is now a professor at Universidade Federal do Rio de Janeiro. “The question that remains is whether the government will raise the rates” on PSI loans.