One of the risks that have been increasing in Brazil, quite unnoticed by financial markets, is the fiscal risk involved in public banks credit expansion. BNDES, the Brazilian development bank, has received more than two-hundred billion reais to expand its loans. A few weeks ago, the Minister of Finance and the president of the BNDES gave a joint presentation to justify the subsidized loans made by the Treasury to the BNDES, entitled “Benefits of the Treasury’s Loans to the BNDES”.
One cannot say that the title is inaccurate as the presentation, in fact, dealt only with these loans’ benefits. As it did not estimate their costs, it cannot be regarded as a serious evaluation of the subsidized loans. It was alleged in the press that estimating the costs would require “guessing” the future path of the Selic rate, the Central Bank’s short-term interest rate. A strange justification, indeed, as in cost-benefit analyses, in which the BNDES has great expertise, it is customary to perform estimates of the future behavior of economic and financial variables, taking different scenarios into account.
The allegation becomes even less defensible when, to criticize “a simplistic calculation”, a graph was presented showing three future scenarios for the difference between the Selic rate, and the TJLP, the regulated long-term interest rate used for BNDES´s loans. After all, with these scenarios, it is possible to estimate the fiscal cost of these loans. All scenarios forecast that the Selic rate will equal the TJLP rate: the most optimistic in 2016, the intermediate one in 2018 and the third in 2020. It would be interesting to show the trajectories of these two rates – the TJLP and the Selic – and not just the difference between them. However, assuming that the TJLP rate will not be raised from its current level of 6%, it follows that the Selic rate will decline to 6%, or less, between 2016 and 2020. If the current 4.5% inflation target is maintained, this will lead to a real equilibrium interest rate (neutral rate) of 1.5%, which is even lower than the USA’s, a highly improbable hypothesis. Thus, the implication of the scenarios presented is that the economic authorities intend to either increase the TJLP rate or reduce the inflation target, which are the variables under their control. Even so, it is unlikely the real equilibrium rate of interest, will decline as rapidly as the presentation supposes, although such trajectory would be very desirable.
In the case of projects with non-tangible social benefits, like those usually financed by the BNDES, the quantification of costs is the easiest part; the problem is quantifying the non-financial benefit. Nevertheless, despite demonstrating an insurmountable resistance to the measurement of costs, the difficulties encountered in estimating the benefits of these loans were apparently negligible.
According to the document the benefits are threefold: additional profits for the BNDES, an increase in investments, GDP and tax revenues and an increase in productive capacity. It is assumed that were it not for the Treasury funds, the investments thus financed would have been totally abandoned in 2009 and partially cancelled in 2010. Disbursements amounted to R$84.5 billion in 2009 and estimated at R$95.5 billion in 2010.
Although BNDES financings, as well as those of the other state banks, were fundamental in keeping credit flowing at the height of the crisis, it is rather unreasonable to suppose that, without the BNDES’s subsidized loans, none of the other investments financed by the BNDES would have been undertaken after the end of the crisis. Any businessman who has access to BNDES funds prefers to borrow them because they are cheaper. But this is a not to say that the investment would not be made without these subsidized funds. It is important for the quality of the debate that the Government makes a greater effort to adequately measure the BNDES’s role in the country’s investment.
Also, according to press reports, the Minister of Finance, during the presentation assured that alternatives to Treasury loans to the BNDES would be sought. However, it was later revealed that the BNDES had requested another R$ 60 billion from the Treasury for next year, when, as far as one can see, the country will not be exactly facing a crisis.
It is true that the private financial system does not yet provide sufficient long-term funds for productive investment and that the BNDES will continue to play an important role. But, if the country is to attain sustainable growth, the private financial system must increase its participation, and not reduce it. The view that the BNDES should continue to strongly expand its lending is misguided.
It is equally important to be aware that if the Treasury continues to transfer billions of reais in subsidized loans to the BNDES, it will be contributing to a significant increase in fiscal risk. Especially when one knows that the National Treasury is engaging in dangerous creative accounting to mask the fiscal gap that is being generated. The BNDES, for example, draws its profits from subsidized loans and transfers dividends to the Treasury, thus improving the primary surplus. Using the subsidized loans, the BNDES has already bought future Electrobras dividends, thus also increasing the primary surplus. BNDES’s investment in Petrobras’s capitalization will be accounted as extra Federal Government revenue, also helping to achieve this year’s fiscal target. Where is such a sequence of assaults on our public accounts going to lead us? Wasn’t the Greek example of just how imprudent it is to follow the path of creative accounting enough? Although net debt is trending downwards, the fiscal risk is increasing significantly. What is now being done to conceal the non-fulfillment of the primary surplus target is not essentially different from what was done in 1973, during the dictatorship, to hide the increase in inflation.
Contrary to what is being done, it is essential that National Treasury transfers of funds to BNDES, as well their implicit subsidies and risks, be treated with the utmost transparency and be shown in the Federal budget in unequivocal fashion, so that civil society may evaluate this kind of program, and exercise legitimate pressure on the Executive and Legislative branches. This is the right way to proceed in a democratic society.