Abstract:
The creation of the Taxa de Longo Prazo (TLP) to substitute the Taxa de Juros de Longo Prazo (TJLP), as envisaged in the “Provisional Decree” (Medida Provisoria) N. 777 currently being debated in the Brazilian Congress can have significant impact on Brazil’s economic performance. This short note offers a contribution to the debate based on a combination of fresh and existing analytical evidence.
The key message of this note is that the reform is expected to have a very positive effect on the Brazilian economy. First it would constitute a meaningful step to improve the allocation of capital in Brazil, which is expected to raise productivity and economic growth. Several rigorous studies of the impact of subsidized credit programs, including a new study recently conducted by the World Bank, have found that the BNDES subsidized credit has had little or no impact on investment and jobs creation, and none on productivity. Studies also found that BNDES credit mostly benefited large and profitable firms, lowering their financial expenses, but with no effect on their investments and performances. Hence there is ample empirical evidence which suggests that the reform will have no negative impact on economic performance.
Second, the reform will facilitate the efforts towards fiscal adjustment—which is essential to boost investment, jobs creation and economic growth in a sustainable manner in Brazil—and it will prevent an automatic increase in fiscal costs should the SELIC interest rate rise again. It is important to note that reform does not remove the possibility for the government to provide subsidized credit. It only delinks the provision of subsidies associated with BNDES credit from the decision to provide the credit. The current subsidies implicit in BNDES credit are opaque. They do not appear in the budget, but still increase the public spending and public debt. The proposed change to the TLP would bring several benefits in this regard: (i) it would maintain full flexibility for the government to offer credit subsidies; (ii) it would make these subsidies transparent and included in the budget, which is always desirable and especially so in a fiscally constrained environment; (iii) and it would thereby make it easier to allocate any subsidies where they have the greatest impact.
Third, the reform will also improve the monetary policy transmission, which will help reduce interest rates volatility and economic volatility, to the benefit of the entire economy. This is because the TLP reform substantially increases the share of credit market that responds to monetary policy movements and therefore will allow the central bank to limit the movements in the SELIC interest rates.
Fourth, although it is true that the reform may raise and increase the volatility of interest rates for firms borrowing BNDES funds, in practice this impact is expected to be small based on the research on investment and productivity referred to above, and it will be mitigated by the positive effects on reduced interest rates and volatility from the rest of the credit market.
Fifth, the reform would also bring benefits to BNDES operations. Notably, by providing a market-based and transparent reference rate, the TLP will make it easier for BNDES to raise funds through securitization of certain assets and hence leveraging private finance.
Sixth, the TLP would also better remunerate the Fundo de Amparo ao Trabalhador (FAT), reducing the costs imposed on all workers whose savings are currently remunerated at a much lower rate than those offered by the market. In addition, this may also reduce the high labor turnover rate and thereby also contribute to higher productivity—aside from giving workers better unemployment support.
Finally, the timing of the reform is ideal, since the TJLP and the estimated TLP rate are now close, such that the adjustment costs for firms will be minimal. In fact in our view the 5-year transition period from the TJLP to the TLP envisaged in the Medida Provisoria 777 could be significantly shortened considering the currently small gap between TJLP and the level of the proposed TLP.
