SAO PAULO (Reuters) - For decades, Brazilian companies large and small have been hooked on cheap credit from state development bank BNDES.
That reliance weakens public finances and squeezes private banks out of credit markets. Critics say that instead of forcing them to kick the habit, President Dilma Rousseff has plowed more and more money into BNDES since taking office in 2011.
With the economy now stagnant, she faces pressure to clean up the budget and reduce state intervention in the economy. In the first nine months of this year, Brazil’s government spent more than it raised even before debt payments, its first primary budget deficit since 1994. Credit rating agencies warn they could downgrade Brazil as early as next year and are closely looking at whether a smaller role for BNDES will be among Rousseff’s policy shifts in her second term, which begins in January.
“Redefining the BNDES role is a key signal that the government is serious on the fiscal front,” said Alberto Ramos, chief Latin America economist with Goldman Sachs. “Investors will be very attentive to any steps toward addressing the bank’s overwhelming presence in credit markets.”
Since its launch in 1952, BNDES has been practically Brazil’s sole source of corporate credit. On Rousseff’s watch, it has lent over 570 billion reais ($233 billion) at subsidized rates funded mainly by government bond sales, sparking a jump in debt.
The gap between the interest rate Brazil pays investors in order to fund BNDES and what the bank pays for that support has reached 6.25 percent, costing taxpayers 35 billion reais a year, and it is expected to widen further over the next year.
The government acknowledges the strains that BNDES lending causes but it has helped drive growth over the years so Rousseff is wary of reducing its role, especially as private-sector credit remains scarce and expensive, two sources with knowledge of her administration’s thinking said.
Should Rousseff make no changes or only gradually streamline fiscal policy and BNDES, economists worry Brazil’s woes will worsen: a mounting budget deficit, faster inflation, the crowding-out of banks and debt markets from corporate financing, and ultimately a loss of Brazil’s investment-grade ratings.
They also say hefty BNDES lending makes it harder for the central bank to control money supply growth and head off persistently high inflation.
BNDES’ role looks less impressive now the economy is weak: industrial activity and investment have fallen for four straight quarters and gross domestic product contracted in three of them.
Some homegrown groups that BNDES financed, like oil services company Lupatech SA and the debt-laden companies founded by fallen energy tycoon Eike Batista, are struggling.
Two-thirds of BNDES’ loan book goes to big companies which could seek funding elsewhere. Petróleo Brasileiro SA, TIM Participações SA and América Latina Logística SA were among its top 10 borrowers last year.
Still, attempts to reduce its loan portfolio by curbing government support or raising the below-market TJLP interest rate that it charges on loans could hurt hundreds of companies.
“The bank cannot abandon tending to the necessities of businesses, therefore its size will depend on these necessities and the availability of other alternative financing sources,” BNDES said in a statement responding to questions from Reuters.
Without the below-market lending rates from BNDES, companies would pay about 32 percent for a revolving credit facility and a staggering 174 percent for an overdraft loan.
STATE-LED ECONOMIC GROWTH
Creating conditions for commercial banks and bond markets to take up some of the slack could mitigate the impact of a BNDES downsizing. Stepping up guarantees and liens or teaming up with rivals to set up loan syndicates could help BNDES reduce credit risk without growing its loan book significantly, said Sergio Lazzarini, a finance professor with Insper business school.
Nelson Barbosa, who some officials cite as a candidate to become Rousseff’s next finance minister, defends implementing gradual hikes in the TJLP to lower the burden on government coffers and ease distortions in credit markets.
Despite all the talk about scaling back BNDES, officials have balked at doing so. It lent 185 billion reais in the 12 months through June - near an all-time high, and 60 percent more than the amount funded globally by the World Bank.
Last week, a local newspaper said the Treasury could pump 30 billion reais into BNDES within weeks. One source said it could “mean more of the same policy recipe going forward” although Treasury Secretary Arno Augustin, one of the masterminds behind a larger BNDES, declined to confirm the plan.
Rousseff’s predecessor Luiz Inacio Lula da Silva instructed BNDES to boost lending during the global financial crisis. The plan worked and the economy expanded sharply in 2010, drawing praise for BNDES as a model of state-led economic growth.
BNDES was a cornerstone of a policy to foster “national champions”. Its loans financed JBS SA’s rise as the world’s No. 1 meatpacker and sponsored the creation of Fibria SA, the world’s top pulp producer, through the merger of debt-laden rivals VCP and Aracruz in 2009.
Last year, BNDES funded about 26 percent of fixed capital spending in Brazil, compared with 6 percent a decade ago.
“BNDES has worked to support investment and, had the bank not done so, it would now be lower,” BNDES said.
But critics say the strategy went too far, hurting fiscal health and spurring inflation by extending loans with interest rates lower than the central bank’s Selic overnight rate.
Infrastructure companies pay yields of about 14 percent on inflation-linked debt they sell to fund their projects, while interest on a BNDES loan is 3 percentage points above the TJLP, which has been held steady at 5 percent since March 2013.
Emy Shayo, an equity strategist with JPMorgan Securities, said a higher TJLP could hurt utilities and toll road operators like Arteris SA, leading them to demand steeper return rates on new projects. Paper firm Klabin SA and steelmaker Cia Siderúrgica Nacional could see earnings down about 5 percent next year if the TJLP were raised by 1 point, she said.
In part driven by borrowing for BNDES, Brazil’s public debt now stands at 62 percent of GDP. And while the Treasury offers bondholders yields pegged to the Selic, currently at 11.25 percent, BNDES pays interest equal to the TJLP.
BNDES owes the Treasury 455 billion reais, about 15 percent of Brazil’s gross debt.
Still, the government downplays risks of a downgrade, saying its finances are sound and net debt, which subtracts government assets such as BNDES loans from gross debt, remains low.
“I am positive that no rating agency will reduce our sovereign rating,” Augustin said on Friday.
Editing by Todd Benson and Kieran Murray