BNDES: Lender of first resort for Brazil’s tycoons
Posted on January 12, 2015.
The bank faces scrutiny as Brazilians assess the role of state-backed development
During frantic holiday shopping in central São Paulo, Lojas Americanas is doing brisk trade in everything from Chinese-made Christmas trees to The Giants of Samba CDs.
The customers may know that the discount chain is part-owned by Jorge Paulo Lemann, whose estimated $22.4bn fortune makes him Brazil’s richest man. What they probably do not know is that the retailer is partly subsidised with taxpayers’ money.
- Like many major Brazilian companies, Lojas Americanas borrows money at a heavy discount from BNDES, the state-run national development bank. Last year the store and an affiliate received R$2.7bn in BNDES loans mostly at a taxpayer-subsidised rate that is about half what many of its customers pay on their credit cards.
“Really?” said Leonardo Burri, a Lojas Americanas customer, shocked on learning of the subsidy. “This is why, as a Brazilian, I have an urge to take up foreign citizenship.”
With annual disbursements bigger than the World Bank, BNDES embodies the belief of her leftist Workers’ party, or PT, in the virtues of state intervention in the economy. This faith has only grown during the PT’s 12 years in power, and was cemented by the vogue for Chinese-style state capitalism that grew out of the free market-led collapse of the 2008 global financial crisis.
But now the belief in state-managed capitalism is being tested as Brazil’s economy enters its fifth year of stagnation. The cost of statist policies has become manifest in the rise of public debt and the budget deficit.
To avoid a credit rating downgrade, Ms Rousseff has appointed a new finance minister, Joaquim Levy. As well as bringing Brazil’s public finances under control, one of his main tasks is to rein in BNDES. The government has already outlined changes in the development bank’s policies as the focus intensifies on the role of private interests in the state.
The bank has grown so much that its subsidy costs the government more than Brazil’s much-lauded bolsa família monthly benefit for poor families — earning the bank the nickname Bolsa Empresário, or “tycoon grant”. Critics argue it is a source of economic distortion and cronyism that undermines Brazil’s hard-won democracy.
Even some big businessmen accustomed to working with the bank are calling for it to be curtailed. “We need to promote a tapering of BNDES,” said André Esteves, chief executive officer of homegrown investment bank BTG Pactual in a recent interview.
Founded in 1952, BNDES originally fostered the country’s steel industry and created a shareholding arm, BNDESPar, to manage its equity investments. It aimed to address “market failure”, lending to industry when the private sector was unwilling or unable. Over the decades, particularly during Brazil’s period of runaway inflation in the 1970s and 1980s, long-term finance was not available from the market, so BNDES stepped into the breach.
During the PT governments of Luiz Inácio Lula da Silva and Ms Rousseff, the bank exploded in size. BNDES’s total assets have grown nearly fourfold since 2007 to R$814bn as of June 30 last year, while disbursements last year were estimated at R$190bn, more than the annual output of neighbouring Uruguay.
Critics say the central complaint about BNDES is it essentially amounts to a transfer from taxpayers to businesses. This is particularly pernicious in a country that is one of the most unequal in the world. “There have to be some public objectives, some social justification,” Arminio Fraga, a former central bank governor and opposition figure, said of BNDES lending in an interview during the elections in October.
About 60 per cent of BNDES lending goes to large conglomerates rather than small and medium-sized enterprises, including many large companies deemed so-called “national champions”, in which it often also holds significant minority stakes.
BNDES and BNDESPar hold about 17.3 per cent of the state-owned oil company Petrobras, while BNDESPar alone holds an estimated 8.4 per cent of Vale, the world’s biggest iron ore exporter, and 24.6 per cent of JBS, the world’s largest meatpacker. BNDES also funded the oil, mining and logistics empire of companies controlled by Eike Batista, who was Brazil’s richest man until his group imploded last year.
All of these are quoted companies with ready access to western capital markets, and do not need public money, critics say. Even Mr Batista raised billions on the stock market before going bust. “The large companies can raise money on their own — it will be more expensive but it will not impede their investments,” said Sergio Lazzarini, professor at São Paulo business school Insper and co-author of Reinventing State Capitalism, which analyses BNDES.
Fostering the market
The dominant presence of BNDES in long-term lending has crowded out the private sector when record low interest rates globally might have fostered the domestic capital market, critics argue. Even some clients admit as much. “To be competitive, you have to take those BNDES rates into consideration,” Marcelo Odebrecht, the head of the eponymous construction group, said in Valor Economico, a business daily.
BNDES funding is so irresistible to businesses because it lends based on the TJLP, its long-term benchmark interest rate. As part of Mr Levy’s drive to clean up Brazil’s accounts, the government recently raised the TJLP for the first time in 10 years. Even so, it remains at only 5.5 per cent, less than half Brazil’s “risk-free” short-term rate, or Selic, which is set by the central bank and stands at 11.75 per cent.
BNDES can provide this generous subsidy because it enjoys cheap funding from two main sources — the treasury and workers’ employment insurance funds. For the workers, this implies a huge opportunity cost as they could have earned far higher market rates on the money elsewhere. “It’s like a transfer of wealth from workers to the industrialists,” says Aldo Musacchio, professor of business at Harvard and co-author of Reinventing State Capitalism.
The Treasury, meanwhile, incurs a loss as it raises money for the bank by issuing bonds at the Selic rate.
The government is defensive about criticism of BNDES. Guido Mantega, Brazil’s previous finance minister, claimed the bank’s huge ramp-up in lending helped counter the effects of the financial crisis. Yet the bank sustained high lending levels after the crisis subsided in 2010. Last year’s outlays were as big as in 2013, which was itself a record.
The bank points to its competent staff — non-performing loans are negligible and it makes more profits per employee than private sector lender Itaú-Unibanco and other development banks in Germany or China. It is not the clichéd state bank that props up bad companies. Seth Colby, an academic at Johns Hopkins University, said in a recent paper: “The policies of the BNDES are often contested, but its organisational capacity is highly regarded.”
Yet BNDES might not be profitable if its true cost of funding was accounted for. In addition, BNDES enjoys low default rates because it can pick the best borrowers, which should have turned to the market instead, say Mr Musacchio and Mr Lazzarini.
Such arguments even call into question the raison d’être of BNDES. Brazil still only invests 17 per cent of gross domestic product every year — less than the 22 per cent or more needed to raise growth or investment rates in faster-growing Latin American countries such as Chile, Colombia, Mexico or Peru.
Nor has its lending necessarily led to more jobs being created. Mr Musacchio says listed companies that received BNDES funding usually did not increase their capital expenditure plans after receiving the loans. Instead, they used the cheap money to reduce their costs. “They are really lending to firms that don’t need the money,” he says.
That counters Ms Rousseff’s emphasis on policies that help the poor, although BNDES argues that such criticisms ignore its own research which shows the benefits of its programmes, especially for SMEs. It adds that borrowers such as Lojas Americanas receive money at higher rates than the TJLP, while support for JBS has mostly been in the form of equity.
Arguably more serious, though, are charges that its activities distort Brazil’s macroeconomic and political landscape. Critics say Brasília uses BNDES and other state-run banks to dress up the budget deficit by having it pay dividends to the government from treasury bonds that it keeps on its books.
“You are transforming your own debt into revenue … which is completely crazy,” says Mansueto Almeida, a specialist in Brazilian government finances. BNDES denies this is a deliberate government policy.
There are also concerns that BNDES’s cheap capital might undermine the central bank’s efforts to control inflation. Its low rates mean other Brazilians have to suffer higher rates. Studies also show that donors to the ruling party tend to receive more BNDES money. The biggest donor in the 2014 election was JBS, the meatpacking group controlled by the Batista family (no relation to Eike Batista) with BNDES as a shareholder.
That is especially so for companies bidding for public contracts. One 2011 study by Taylor C Boas, F Daniel Hidalgo and Neal P Richardson found: “Firms specialising in public works projects can expect a substantial boost in government contracts — at least 8.5 times the value of their contributions — when they donate to a federal deputy candidate from the Workers’ party.”
The tussle over BNDES goes to the heart of Brazil’s problems — these range from a statist vision of the economy that has concentrated power into the hands of the ruling party and its main corporate donors, to corruption, a slowing economy and public services often so shoddy that they brought millions of protesters on to the streets in 2013.
Under pressure over the deficit, the government last month signalled changes in BNDES’s policies. The bank said projects linked to infrastructure, innovation and the environment as well as SMEs would still receive the TJLP rate. But other sectors would receive a mix of subsidised and market rates.
Mr Levy followed this up in his inauguration speech last week by calling for an end to “patrimonialism”, the carving up of the state by powerful private and political interests. Unwinding vested interests will be difficult. Bank officials say they cannot guarantee BNDES will not need any more transfers from the treasury. But if Brazil is to grow again, the state must leave entrepreneurs such as Mr Lemann of Lojas Americanas, who is eyeing US projects with his new partner, Warren Buffett of Berkshire Hathaway, to run their own risks.
“There seem to be fewer and fewer groups who believe in the status quo,” said Mr Fraga, the former central bank governor. “Even those that are … milking the cow … have figured out that the cow is dying. There has to be change.”
Lending strategy: Critics urge shift in focus from ‘national champions’
BNDES may have a dominant presence in Brazil’s lending market but many businessmen complain they cannot get a look-in at the government-run development bank. “To us they are a very long way away, over there in Rio,” says a São Paulo retailer. “We never think of them as a possible partner.”
Although his group is not considered small by Brazilian standards, he says borrowing from the bank is too complicated for many medium and small businesses. He declined to reveal his name in print to avoid offending BNDES, one of Brazil’s most powerful institutions.
While BNDES counters that about 40 per cent of its portfolio goes to smaller companies, it is known for lending to bigger ones, particularly “national champions”.
A paper from Mansueto Almeida, an analyst at Brazil’s Institute of Applied Economic research, said proposed international champions included Oi, the only nationally controlled Brazilian mobile operator, which was created with R$2.6bn in loans from BNDES and R$4.3bn from another state-owned bank, Banco do Brasil, in 2007-08.
Ambev, the beer company controlled by Jorge Paulo Lemann of Lojas Americanas, received R$1bn between 2003 and 2009, helping him and his co-investors go on to create global brewer AB InBev.
Vinicius Carrasco, a Stanford-educated economist at the Pontifical Catholic University in Rio de Janeiro, said BNDES loans should be more carefully directed. “The only way one can justify this kind of intervention is in projects that are desirable from a social perspective but which cannot be funded by private agents.”
But what raises the eyebrows of critics more than the national champions is BNDES’s support for overseas projects, such as a port in Cuba and an airport in Mozambique, when Brazil has a chronic shortage of such facilities. Source: Financial times