IN 2009, as Brazil was rocked by the global financial crisis, its president, Luiz Inácio Lula da Silva, was seething. The mess, he complained, was the fault of the “blue-eyed whites, who previously seemed to know everything, and who are now showing they know nothing at all.” For him, the crisis was a repudiation of Anglo-Saxon liberalism and a demand for state capitalism. Like many countries, Brazil has cut interest rates and increased spending. Unlike many other governments, however, Brazil has used its state-owned development bank, BNDES, to channel subsidized credit to Brazil’s largest companies. Thanks to cheap Treasury loans, the bank doubled its lending, which peaked at 4.3% of GDP in 2010. For most loans, interest rates were half the level of Selic, the central bank benchmark.

The plan worked, for a while. Brazil emerged relatively unscathed from the crisis: after a brief recession in 2009, the economy rebounded with 7.5% GDP growth in 2010. But the recovery survived the recovery, at a growing cost to the country. taxpayer. Between 2009 and 2016, Treasury grants to BNDES totaled 116 billion reais (48 billion dollars). Big Brazilian companies have become addicted to cheap credit. Some have been accused of obtaining the loans fraudulently. One, a meat packing company called JBS, borrowed R $ 8.1 billion from BNDES; he embarked on a spending frenzy, buying meat producers in America, Australia and Europe, and became the world’s largest meat packer. BNDES also exploded. It now represents 15% of total loans to the private sector; its balance sheet is as big as that of the World Bank.

But times have changed. Brazil is only slowly emerging from the worst recession in its history, having lost its status as a prime sovereign borrower in 2015. Its public finances are weakened: last year, it recorded a gross budget deficit (i.e. that is, including debt service) of 8.9%. of GDP. Government grants are on the chopping block. BNDES currently lends at a low margin over the cost of its treasury funds – a rate called TJLP, which is set low by the National Monetary Council, a body made up of the central bank governor and finance ministers. and the Plan. In September, the Brazilian Congress decided to replace that rate with a new one, known as the TLP, which will be set monthly by the central bank and indexed to five-year government bonds. The new rate will be introduced on January 1 and will be phased in over five years. This could save the Brazilian treasury 0.25% of GDP per year, predicts Neil Shearing of Capital Economics, a research firm.

Not everyone cheers. BNDES customers complain about the increase in the cost of capital, threatening jobs. Raising interest rates is also likely to reduce BNDES ‘market share and therefore squeeze profits, warns Moody’s, a rating agency. But the reform has been well received by small and medium-sized enterprises. Brazil’s central bank is currently forced to set Selic at an artificially high level to offset the impact of the BNDES subsidized rate on the economy at large. By “making all credits in the economy sensitive to the central bank,” monetary policy will become more efficient, argues Morgan Stanley’s Arthur Carvalho. Thus, borrowing costs should drop for companies too small to call on BNDES (the bank does not currently offer loans below 20 million reais).

The reform is an important step forward in the Brazilian government’s efforts to contain public spending and the budget deficit. But that does not go far enough in reducing the deficit. The country’s overly generous and unaffordable pension system costs 13% of GDP. Without reform, public spending on pensions could reach one-fifth of GDP by 2060, when the number over 65 is expected to drop from 17 million today to 58 million. Hopes that a pension reform could be passed by Congress were high until May, when Michel Temer, the president of Brazil, found himself embroiled in a corruption scandal. Efforts to revive it have so far not been successful. The reform of the BNDES is long overdue. But it will take even more rigor to put the country on a solid financial footing.

This article appeared in the Finance and Economics section of the print edition under the headline “A New Years Resolution”