BNDES chief calls for fiscal restraint

10/10/2010 | Thierry Ogier

A top Brazilian government official has acknowledged the need for “fiscal restraint” – but he said this largely depended on the market’s capacity to spur long-term investment

A senior Brazilian government official has acknowledged the need for “fiscal restraint” – but he said this largely depended on the market’s capacity to spur long term investment.

Luciano Coutinho, president of the Brazilian national economic and social development bank (BNDES), said in Washington yesterday: “Now is time for us to ‘crowd in’ the private sector, which has to help in financing long term investment in Brazil. This is the challenge.”

Coutinho’s statement comes after repeated calls from IMF and World Bank officials for Brazil to rein in public spending and fiscal stimulus.

“Brazil’s fiscal performance has been very good”, Coutinho said in an exclusive interview with Emerging Markets. “We were able to overcome the crisis [global recession] at a very low cost.

“Now that we are growing, of course we need some fiscal restraint, a long term fiscal policy. But that has to be exercised in a way that is consistent with social demand, better public services, and so on.” Part of this approach would be to “crowd in” private investment.

Coutinho, who enjoys the full confidence of presidential election favourite Dilma Rousseff and is tipped to become her finance minister, said that it would not be wise to “frustrate investment and economic growth in Brazil”.

“We are cooperating with private sector banks and capital market entities in order to create more stimulus from the fiscal and the tax/regulatory side, in order to promote the expansion of private (sector) banking in capital markets to long term financing.

“The BNDES and the private sector have to coordinate, so that the BNDES could moderate its role and ‘crowd in’ the private sector. This has to be synchronized, otherwise capital costs could rise too much and punish investment decisions – which is not desirable.”

The BNDES’s funding received a boost of more than $100 billion from the Treasury in the past two years. “We hope [we will not need any extra injection from the Treasury], but it will depend on the ability of the market to evolve,” Coutinho said. “If needed, I will ask the Treasury [to do so], we cannot interrupt the cycle of investment in Brazil.

“The cost of funding the BNDES is declining, because interest rates will fall in Brazil. The reduction of the spread between the long term interest rate [6%] and the short term interest rate [10.75%] will make the subsidy vanish,” he said.

Coutinho also spelt out his vision for a more efficient public service, as part of his fiscal restraint policy. “This means [...] higher productivity: quality and improved management in the public sector, to generate more public savings, on the one hand, and on the other hand, to improve the supply of public services that are needed for the development” of the country.

“Brazil has a big opportunity to show fiscal improvement, coupled with improved efficiency in the public sector.”

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