Increase in public and earmarked credit may delay interest rate drop

The growth in the granting of loans and financing by public banks and in earmarked credit operations – with resources or rates established by the government and often subsidized – may delay the beginning of the reduction in the basic interest rate.

The phenomenon is a characteristic of PT governments, which on other occasions have resorted to state-owned banks and earmarked credit to try to heat up the economy.

This year, although GDP in the first quarter was a surprise, it is known that the main impetus came from agribusiness, while household consumption and productive investment performed poorly, both influenced in some way by high interest rates.

The problem is that the intensification of public and earmarked credit makes it more difficult to combat rising prices and makes it difficult for inflation to converge to the target. “It is a strategy that reduces the power of monetary policy”, says economist and partner at Tendências Consultoria, Sílvio Campos Neto.

Experts heard by People’s Gazette point out that, in an attempt to control inflation, the Central Bank raises interest rates or maintains them at high levels. The objective is to cool down demand and, therefore, avoid further price hikes.

By expanding the release of credit through public institutions, the government goes against the BC’s efforts, stimulating economic activity.

History shows that by forcing more earmarked credit, which is cheaper for some, the government ends up raising the cost of money for others – that is, most businesses and consumers.

This occurs because the greater the share of earmarked loans in total credit, the smaller the reach of the Selic rate, used by the BC to control inflation and which acts mainly on free credit.

Thus, the BC ends up keeping the Selic at a higher level than would be necessary, making credit more expensive for those who do not have access to targeted credit lines, such as resources for the Safra Plan, Pronampe and BNDES disbursements.

Today the Selic rate is 13.75% per year. The next meeting of the Central Bank Monetary Policy Committee to discuss the matter is scheduled for the 20th and 21st.

With a dominance of public resources in the credit market, it will be necessary to maintain the Selic rate at high levels, points out the manager of economic analysis at the National Confederation of Industry (CNI), Marcelo Azevedo.

It is precisely the opposite of what President Luiz Inácio Lula da Silva (PT) wants, who since the beginning of his mandate has been criticizing the Central Bank’s interest rate policy.

Operations by public banks already exceed loans by national private banks

The balance of credit operations in public institutions is already greater than that of private banks with national private capital. The overruns occur in February and, in April, public banks had a total of BRL 2.31 trillion in loans, against BRL 2.26 trillion for Brazilian private banks.

The ratio between the balances of credit operations carried out by the private sector, including foreign capital institutions, and those in the public sector also fell to the lowest level since October 2021. In April, for each real borrowed by public institutions, there was BRL 1.32 borrowed by private individuals.

Meanwhile, BC data show that the balance of earmarked credit operations grew 14.7% between April 2022 and 2023, reaching BRL 2.2 trillion. Free credit, in turn, increased by 10.2%. But this one is even bigger: R$ 3.2 trillion.

Economic situation favors public credit growth

So far, the economic scenario is favoring the growth of public and earmarked credit. “The slowdown in economic activity caused by the more restrictive monetary policy ends up having a strong influence”, says the chief economist at the National Association of Credit, Financing and Investment Institutions (Acrefi), Nicola Tingas.

According to him, when the economy operates under a restrictive monetary policy, to combat inflation, defaults and the risk of bank losses increase and the supply of free credit contracts in a greater proportion than earmarked credit: “As a result, the credit system public credit relatively increases its participation in the total credit portfolio”.

Tingas also points out that, in times of stimulus to economic activity by the government, in general, public banks expand their credit concession faster and more intensely than the private system.

Although the use of public banks is defended by Lula and his party, at least part of the recent growth of these institutions can be attributed to the government of former President Jair Bolsonaro (PL), who adopted measures to stimulate the economy during the electoral period.

The new management of Caixa Econômica Federal, for example, claims that an internal audit and also control bodies are investigating the granting of loans in 2022 to beneficiaries of the Auxílio Brasil and to “negative” people – together, the two modalities involved approximately R$ 10 billion. The BC survey runs until April, when Lula’s mandate completed four months.

Use of public banks can distort the market

Analysts point out that the greater presence of public banks in the credit market is worrying. “The use of financial institutions as providers of capital distorts markets. It’s not just a question of discouraging free competition, but wanting to create bad, perverse incentives”, says professor at Ibmec-MG and specialist at Instituto Millenium, Cláudio Shikida.

There are historical precedents. In the 1990s, there was a strong state presence in the financial system, through state banks. “Privatizing them was also an effective response for society”, highlights the professor.

A study carried out by the Central Bank in 1992 showed that these banks were less efficient than their private counterparts: personnel expenses corresponded to 82.5% of administrative expenses. In private, 59%. “Not to mention the employment problems, the use of financial institutions to finance the states”, emphasizes Shikida.

He points out that financial markets stimulate economic development when they are supported by pro-market institutions and there is respect for property rights and legal security. “Thus, the government can even be – and should be – the regulator of the financial system, but it won’t be good if it creates barriers to private initiative”, he says.

Shikida points out that, in the current ideological view, in its most aggressive version, public banks should replace private ones in their role of financial intermediation. In its milder version, the government would occupy a part that is now operated by private institutions.

Sílvio Campos Neto, from Tendências Consultoria, believes that public banks are important for the economy, but that the use of their resources needs to be more moderate to avoid negative impacts on competition and the capital market, through the granting of subsidized credits.

“The greater presence of private resources encourages competition, in a scenario in which equity capital is still the main source of funds for financing companies”, complements Azevedo, from CNI.