What Is the BNDES For?

There is a need for more transparency on the part of the BNDES (Brazilian National Development Bank) and a better assessment of the costs and benefits of subsidized loans.

The BNDES’s preposterous involvement in the corporate dispute between French multinationals over the Pão-de-Açúcar supermarket chain shows that the state-owned bank has strayed far from its original mission. What exactly is the BNDES’s role nowadays?

Its role should be to complement the private financial sector by compensating for “market failures”. In thesis, this should involve providing support for firms that would not otherwise have access to capital under reasonable conditions, to enable them undertake their productive investments. Given the Brazilian domestic financial system’s current stage of development, as well as international financial institution’s enormous interest in financing firms in Brazil, the BNDES should focus mainly on small and medium firms. Its objectives also include support for strategic sectors and technological innovation.  However, in order to support innovatory initiatives and firms excluded from the private financial and capital markets, there would be no need for the hundreds of billions of BRLs[1] lent by the National Treasury (NT) to the BNDES in recent years.

The hundreds of billions of BRLs that enabled the BNDES to more than double its loan portfolio were destined primarily to the financing of large firms that nearly all have ample access to alternative funds in both the domestic and international markets. The reason they resort to the BNDES has little to do with a supposed impossibility of obtaining loans in the private market, but rather with the fat subsidies afforded by the state bank’s lines of credit.

Contrary to its original function of complementing financial and capital markets, the BNDES nowadays acts mainly to allocate subsidies to firms that are picked to be winners.  The BNDES’s staff is undoubtedly highly qualified. Nevertheless, any choice of winners made behind closed doors tends, in the long term, to produce results that are worse in terms of economic growth than competition between firms in the marketplace. If there were Microsofts, Googles or Facebooks in gestation in Brazil, would the BNDES be able to identify them?

Thus, BNDES funds are concentrated in the largest firms that represent the best (because lower) credit risks. The concentration of biggest and best firms in the state bank’s loan portfolio inhibits the development of the private credit market. Moreover, the size of the BNDES, which allocates nearly a quarter of the Brazilian economy’s credit and is still growing, increasingly hampers the transition to normal market mechanisms.

It is true that during the crisis the BNDES and other state banks played an important role in preventing a sudden contraction of credit to the productive sector. But they could play this role again, in the eventuality of another crisis, with the size they had at that time. The enormous expansion recorded has nothing to do with the crisis, except as a means of justification.

Another problem caused by the huge increase in BNDES credit lines and other  earmarked credits (housing  and rural) was opportunely  discussed  by Alexandre Schwartsman (“Sobre jabutis e jabuticabas”, Valor Econômico, 7/7/2011, page A13). As more than a third of the country’s credit is granted at subsidized rates that do not  vary along with the Selic rate, monetary policy loses traction. Thus, in order to contain inflationary pressures the Selic rate is higher and has to increase much more than would normally be necessary. In sum, Brazilians are quite right to complain about high interest rates and the precarious nature of long-term private credit. However, public policies, that purportedly aim at mitigating these problems, in fact aggravate them and extend their duration.

The para-fiscal expansion associated with BNDES loans has certainly been making it more difficult to combat inflation. When completed, the investments  financed by the bank will indeed increase productive capacity, but before being ready they generate demand, propelling inflation upwards. I am not saying that because of this the investments should not be financed. But it is essential that these impacts be taken into account. Apparently, not even the most interested party, the Central Bank (CB), realizes this. In the “Fiscal Impulse” box of its recent Inflation Report[2], the CB does not even mention the para-fiscal impulse provided by BNDES loans.

No less important is the transparency aspect of these operations. As is well-known, the NT’s loans to the BNDES are granted at rates close to the TJLP (the official long-term interest rate) which currently stands at 6%, less than half the Selic rate (12.25%). This subsidy is not duly explicitated and thus greatly hinders transparency. This subsidy constitutes public expenditure and should be explicitly included in the Federal budget. Instead, the subsidy is jumbled together with the enormous interest rate account (more than 6% of GDP). The blame for the high interest rate account is usually laid solely at the door of the CB, which fixes the Selic rate. However, due to subsidies and the accumulation of international reserves, the net public debt’s implicit rate of interest stands at nearly 17%, well above the Selic rate.

These fiscal costs are not perceived by Congress and civil society. The initiative to include the Treasury’s loans to the BNDES and the Sovereign Fund in the LDO (Budget Directives Law) is a step in the right direction and will hopefully prosper.

Moreover, the details of the BNDES’s main operations should become public knowledge. Bank secrecy provisions currently prevent the publication of such information[3].   But this needs to be changed. Those that receive the BNDES subsidy should be obliged to forego secrecy, just as the names of citizens enrolled in the Family Grant Conditional Cash Transfer Program are included in a public registry. Both receive public money.

For the BNDES to continue to fulfill the role expected of it in fostering the country’s development, it must act more transparently and submit itself to public scrutiny.

[1] The current exchange rate is around 1.56 BRL/USD or 0.64 USD/BRL.

[2] http://www.bcb.gov.br/?id=RELINF&ano=2011.

[3] It was brought to my attention that BNDES currently informs the names of its clients, as well as the amount they borrowed. However, the terms of the loans are not public knowledge.  See http://www.bndes.gov.br/SiteBNDES/bndes/bndes_pt/Institucional/BNDES_Transparente/Consulta_as_operacoes_do_BNDES/.