beyondbrics

The BNDES, Brazil’s government-owned development bank, lent more than it set out to last year, as loan requests and loans approved reached “levels without precedent in the history of Brazil”, as the bank itself put it.

Its triumphal tone will grate with those who believe the BNDES should be shrinking, not expanding. This applies even to Luciano Coutinho, the bank’s president, who told the FT two years ago the BNDES should be “crowding in” the private sector – rather than, as it is often accused of doing, crowding it out.

The BNDES lent R$156bn ($76.3bn) in 2012, a 12 per cent increase on 2011. More impressive was the surge in requests for finance by prospective borrowers, up 60 per cent, and in the number of projects approved, up 58 per cent. As the BNDES’s presentation of its performance in 2012 shows (in Portuguese, but the numbers and graphs jump any language barrier), the bank’s role in supporting the growth of Brazil’s economy is in rapid expansion.

Sounds good? To many critics, it sounds like poison. BNDES loans are based on the TJLP, the “long term interest rate” set by the central bank’s monetary policy committee. It is currently 5 per cent a year, somewhat less than the central bank’s target overnight interest rate – the basis of all commercial lending in the economy – of 7.25 per cent. So those companies lucky enough to be favoured by the BNDES are getting a taxpayer-funded bargain.

“If you compare the BNDES loans to market loans, it is a big subsidy,” says Silvio Campos Neto of Tendências, a São Paulo consultancy. “Some special BNDES credit lines for lorries or capital goods are just 3 or 3.5 per cent nominal, so in real terms [after inflation] they are negative. It’s very hard for commercial banks, which don’t get their funding from the Treasury, to compete.”

In fact the majority of BNDES loans are handled by commercial banks, for whom the BNDES is like an alternative source of funding, only at a big discount. The private banks carry the commercial risk of BNDES loans and apply their own spreads to BNDES funding, just as they do to money they raise in the market.

Critics have long pointed to the BNDES as a big impediment to the formation of mature capital markets in Brazil. About three quarters of all corporate loans lasting three years or more come from the BNDES. What chance is there of developing a functioning market based on the needs of the other quarter that can’t get BNDES funding?

In spite of its trumpeting of its achievements, the BNDES is aware of its ambivalent role in Brazil’s economy. Here is Luciano Coutinho, the bank’s president, talking to the FT in May 2010 about the need to “crowd in” the private sector and develop incentives for longer-term private lending.

His hope that markets would develop quickly hasn’t been fulfilled. But there is a chance Brazil is nearing a tipping point. Although the average interest rate charged to Brazil’s corporate sector is about 30 per cent, central bank data show that for loans to buy capital goods – the kind of loan also provided by the BNDES – the average market rate is now about 10 per cent, down from 15 per cent a year ago.

The market and the BNDES, for the first time ever, are playing in the same ball park – or at least in two ball parks quite close to each other, in roughly the same league.

But Campos Neto at Tendências says it’s too early to talk of a level playing field. “The big question is whether this is sustainable,” he says. Brazil’s banks, after all, have cut their lending rates strongly over the past year, under intense government pressure to deliver cheaper credit to boost growth. Their profits and share prices suffered accordingly, and rates of non-performing loans soared – though they have fallen back again as credit expansion also slowed.

The irony is that, in today’s economic climate, funding is not a great issue in Brazil. Consumers have maxed out on credit. Most companies are too worried about the future to invest much. Where investment is really needed, urgently – in infrastructure – it’s not money that is lacking but expertise.

Not much to sound triumphant about.

Related reading:
Brazil: A bank too big to be beautiful, FT
Brazil’s biggest lender urges lower interest rates, FT
Brazil: time to wean itself off BNDES? beyondbrics