Brazil’s BNDES role questioned

22/03/2010 | Thierry Ogier, Sid Verma

The future role of Brazil’s development bank, the BNDES, is in dispute as the fiscal impact of fund transfers from the Treasury to the institution are questioned

The future role of Brazil’s development bank, the BNDES, is in dispute, as the country considers exit strategies in the economic recovery, and as the fiscal impact of fund transfers from the Treasury to the institution are questioned.

Philip Suttle, chief economist at Institute of International Finance, said yesterday: “Ideally Brazil should wind down BNDES as a counter-cyclical lender.” He added that sufficient tightening may not materialize.

Even though the fiscal impact is not reflected in the net debt statistics, Brazil’s gross net debt ratio has increased to over 70% of GDP, according to Fitch Ratings, the credit rating agency.

Nicolas Eyzaguirre, director of the Western hemisphere department at the IMF, said: “We generally favour that the exiting starts in fiscal policy including the kind of direct lending that the BNDES does before monetary [exiting] but sometimes that is difficult to achieve.”

The BNDES, under president Luciano Coutinho, has been central to the Brazilian government’s counter cyclical policies to face the global financial crisis and the credit crunch. More than 200 billion reais ($110 billion) were transferred to the Treasury in the past three years to boost its funding.

Lending to local and foreign companies operating in Brazil amounted to a record 137 billion reais last year, nearly 20% of overall credit in the economy.

Henrique Meirelles, the president of Brazil’s central bank, has praised BNDES’s role in boosting investment during a period of credit restriction in the private sector.

Partly thanks to the institution, the investment rate in the Brazilian economy in 2009 increased to 17.7% of GDP, but this is still low by international standards. Nevertheless, Meirelles, says the end of the party is in sight.

This weekend Meirelles told Emerging Markets: “It is about time to exit all the crisis measures.”

The BNDES push “was a very important stimulus to the Brazilian economy. The additional funding was directed to project finance. This has been very important for the recovery. Investment is currently leading the growth. But obviously, that stimulus is going to end by June. Private demand and credit growth in Brazil at this point are on a sustainable path and I do not think there is any problem with this.”

Outside government, several economists have pointed out that the BNDES intervention has an implicit fiscal cost and they have stressed the need for more transparency.

Marcelo Carvalho, chief economist at Morgan Stanley, said: “Official fiscal targets are less meaningful because there are so many technical adjustments.”

Paradoxically, with the end of fiscal stimulus in sight, there are concerns that the BNDES may soon run out of steam, as its other sources of funding are drying up, such as an employees’ fund, FAT.

A BNDES spokesman told Emerging Markets: “This is an internal issue. There has not been a firm decision on that and it is not even public.”

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