The National Bank for Economic and Social Development (BNDES) has been experiencing a major shock for the past two years; the expansion route followed since 2008 was suddenly reversed in 2015.  The IEDI has carried out studies on the role played by the BNDES in recent credit developments, the challenges facing its future performance and the proposals that should be considered for improvements in its functions. The present Letter summarizes the first study of a series by economist Ernani Teixeira Torres Filho (the full text can be accessed on the IEDI website, in Portuguese).

According to the author, the change in the BNDES' course of action in recent years has resulted from the simultaneous action of five factors. The first is a circumstantial factor associated with the sharp drop in credit demand, a result of the long and deep recession that hit the Brazilian economy from 2015 onward. The second is related to the ongoing changes in the structure of the long-term credit market and to the prospect of the Brazilian economy going through a prolonged regime of historically low interest (and inflation) rates, at one-digit only levels per year.

The third factor results from economic policy decisions, which compromise the institution's financing capacity. This is the case of the creation of the Long-Term Rate (TLP) by Law No. 13483 of 2017, which established a new formula for determining the interest rate on resources of the Workers' Assistance Fund (FAT). Instead of being determined by the National Monetary Council, according to the government's economic policy like the old Long-Term Interest Rate (TJLP), the new BNDES rate —the TLP— will automatically follow the bond market's risk rate on 5-year Treasury bonds plus the Extended Consumer Price Index (IPCA).

To this measure a fourth factor is added: the drainage of BNDES cash by the National Treasury.  If all the demand announced by the government is met, the BNDES will have returned about R$ 260 billion (Treasury, FAT and PIS-PASEP) by late 2018, that is, an amount of resources equivalent to half of the institution’s total debt with the federal government (as of 2016). These payments greatly reduce the size of the bank's credit asset and jeopardize its liquidity in the medium term.

Finally, the fifth factor of the recent BNDES transformation concerns its reputation. The bank was publicly involved in investigative actions on the illegal financing of politicians by large national companies. Its developmental role was, in this episode, reduced to a mere instrument of subsidy to major economic interests.  Former leaders and part of the bank's technical staff are being investigated by control and justice bodies. 

The combination of these five factors raises strong questions about the BNDES' fate in the coming years. It will not be the first time in the history of the institution that questions of this nature are asked. However, never before, during its more than 60 years of existence, has the development bank faced such a fragile situation.

On the other hand, a few elements that indicate robustness are still preserved. The quality of the BNDES' financial assets guarantees its solvency in the future and opens space for rethinking its operations and liquidity base. Despite all the negative inferences that have been drawn, the risk of its loan and equity portfolios remains much lower than the rest of the banking system's. The same applies to the technical capacity of the institution's staff. There is accumulated knowledge in managing long-term credit operations and equity participation deals that gives a competitive advantage to the institution.

These two elements are neither easy nor quick to achieve and may be of strategic relevance for a government that sees value in having its own consolidated instrument to operate in the financial market with long-term credit operations aimed at promoting economy recovery and national development.

Given this scenario, the present study seeks to succinctly present the evolution of BNDES credit, which, after 2015, no longer acted to counterbalance the reduction of private credit, diverging from the stance adopted in previous years. The institution acted passively and became primarily an instrument of fiscal adjustment. The study emphasizes the performance of the BNDES in long-term operations in the corporate credit market, evaluating the contractionary factors that are putting the institution's operational model at risk.

The proposals presented for the BNDES’ future action are summarized in the final item of this Letter (in Portuguese).

The full text is available in Portuguese.