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Brazil set to pass critical credit reform

State bank BNDES’ benchmark rate set to be replaced; implicit subsidies have been a significant fiscal drain

The Brazilian government is expected to secure its reform to BNDES financing with the approval of a new benchmark rate called TLP before the legislation ‘expires’ on 6 September.

Lucas Aragao, partner and director at Arko Advice, a political risk consultant in Brasilia, says the proposals faced stiff opposition in the committee stage but now that the bill has moved to the floor of the Congress he expects the government to be able to secure a vote and win approval for the reform (with a simple majority) before the early-September deadline.

Despite Standard & Poor’s citing the reform as a critical step to prevent a further sovereign downgrade, the business community reportedly lobbied hard against the changes.

“[Because of the bill’s inbuilt expiry date] timing was key for the TLP reform and so the key issue was getting the bill out of the committee stage where it faced very heavy lobbying from the productive sector,” says Aragao, who adds that the committee’s chairman was seeking to kill the bill because, as a member of former President Rousseff’s Workers Party, he is ideologically aligned against the current administration.

“There is a huge battle in Brazil between the productive sector – by which I mean the large companies that have for many years benefited from below market interest rates from BNDES – and the markets,” says Aragao.

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