No one understands the problems facing Brazil’s economy better than Luciano Coutinho, the man who is arguably Latin America’s most influential banker.
The soft-spoken academic describes how Brazil needs to push forward with efforts to reduce its real interest rates, which are the highest in the world for a large economy, if it is to continue its rapid growth.
This is even though lower rates will mean a reduced role for his institution, Brazil’s development bank, the BNDES, which is presently the main source of long-term funding in the continent’s largest economy, a position that gives it enormous domestic and international political and economic clout.
“The real interest rate level is too high given the soundness of Brazil’s fundamentals,” Mr. Coutinho told the FT in an interview.
Any move to reduce its role will please critics of an institution that is at once praised as a key driver of Brazil’s rapid development but also accused of being a political tool used to choose “national champions”.
With a loan book about four times the size that of the World Bank, the BNDES is virtually Brazil’s only supplier of affordable long-term loans to industrialists seeking to build roads, ports, airports or factories.
Though it bristles at the term “subsidized rates”, the BNDES offers loans at an average of about 6 per cent, much lower than the central bank’s benchmark Selic rate, which stands at 9 per cent.
BNDES argues its loans are awarded only on technical criteria but they still provide an important leg up to those businessmen who qualify for its lending program.
“The BNDES is a fairly well-run bank. Nonetheless, it begs the question about what is the subsequent political relationship between companies that become much larger and more powerful largely based on their access to subsidized lending and the governments doing the subsidized lending,” says Tony Volpon, an economist at Nomura. “It creates a very dangerous set of incentives.”
Created in 1952, the BNDES is admired among developing countries for its relatively efficient lending program. In the postwar days, it helped create Brazil’s core heavy industries and in the 1980s, during the country’s period of runaway inflation, cemented its present role as the near monopoly long-term lender.
Under former president Luiz Inácio Lula da Silva, it mushroomed in size, lending $168-billion (BRL) in 2010, the end of his term, a figure nearly five times greater than when he took office eight years earlier.
Today it is all pervasive. When Brazil sold concessions for its big airports recently, the lender of choice was BNDES. The bank is financing the stadiums for the World Cup in 2014. And it helped pay for the emergence of JBS, the Brazilian beef producer, as the world’s largest meat packer, and the expansion of other Brazilian champions, in many of which it also holds shares.
In addition, the bank undertakes international lending in the form of export finance for Brazilian companies and some sovereign loans to foreign governments, mostly in Africa.
Mr. Coutinho said the BNDES is also eyeing a role in a proposed new development bank being set up by the “BRICs” - Brazil, Russia, India and China.
“Regional multilateral institutions and the World Bank are constrained by the fiscal crisis [in advanced economies]” says Mr. Coutinho. “There is some scarcity of finance for infrastructure in many developing economies. I see room here for this initiative [the BRICs bank]”
While the BNDES is an exacting lender with negligible bad loans, Carlos Pereira, a political scientist with Fundação Getulio Vargas, says his research shows a link between corporate political election campaign donations and the bank’s lending.
“Those firms that provide more campaign donations to winners, especially the president and senators, they do present a higher probability of having more access to BNDES loans and they do better economically, they have more assets,” he said.
For its part, the BNDES rejects the notion its lending is subsidized or only for the privileged. The bank lends aggressively to small and medium-sized enterprises as well as large ones, though the latter dominate its portfolio.
The bank is working on new rules to foster a private corporate debt market to give businesses an alternative for raising long-term money. But short-term interest rates still need to fall further to encourage investors to choose longer term assets. The central bank has already brought the Selic down from a high of 12.5 per cent and seems ready to test a 15-year low of 8.75 per cent.
“We have a window of opportunity because we have softer commodity prices and deflationary forces this year,” says Mr. Coutinho.
“So [policy makers are]searching for a lower threshold [for interest rates] It is something obvious to be tested but that’s not to say that the interest rate should not be lifted if inflation comes back.”