Letter IEDI n. 873–BNDES' and Brazilian capital market's future
Business financing and, in particular, funding for private investments are crucially relevant issues for the Brazilian economy at the moment. The model of private investment financing that has prevailed in recent years, with a predominant role of the BNDES, presents deep difficulties to continue operating on the same bases. This is particularly so given the substitution of the TJLP (long term interest rate) by the TLP (new long term rate) and the early amortization of the resources the Treasury transferred to the BNDES.
In this scenario, the development of a new investment financing model, especially for infrastructure projects and more capital-intensive industrial sectors, is an urgent priority. For this reason, the IEDI has been disseminating studies by researchers in the area. They offer evaluations and suggestions for new medium- and long-term financing mechanisms, and a reformulation of the BNDES's role, as this institution needs to be maintained and reinvigorated to serve as an important agent of our development. These contributions are summarized in this Letter IEDI, which is part of a series of papers that supported the formulation of the IEDI industrial strategy, to be released soon.
The studies, whose main arguments and conclusions are gathered here, include: "The BNDES at a crossroads: how to avoid its dismantling", prepared by economist Ernani Teixeira (and summarized in Letter IEDI No. 828 of Jan 30, 2018); "For a new development, a new BNDES" carried out by IEDI consultant João Furtado (discussed in Letter IEDI No. 834 of Mar 5, 2018); "The BNDES' importance for Brazilian companies' productivity and access to credit", by Filipe Sousa and Gianmarco Ottaviano (IEDI Analysis Jun 1, 2018, in Portuguese); "Investment funding in Brazil and the role of the capital market", by Carlos Rocca (see Letter IEDI No. 850 of Jun 6, 2018), and "For a Relevant BNDES", by João Carlos Ferraz (Letter IEDI No. 857 of Jun 29, 2018).
According to Carlos Rocca, provided there is a low interest rate environment, there are reasons to believe that the capital market can become the most important long-term financing channel of the Brazilian economy. A long-term fiscal adjustment that stabilizes and then reduces the burden of public debt is a basic condition for this. The author recommends the BNDES to work in synergy with the capital market; some examples are: subscribing and supporting the issue of debentures as an alternative to loans, purchasing shares of investment funds in infrastructure, and acting as market maker for infrastructure debentures.
Regarding the BNDES, all studies point out that, even assuming a strong development of the Brazilian capital market, the Bank should continue to play a major role in several areas, such as: infrastructure; modernization and expansion of the industry, agribusiness and services; innovation; exports of manufactures and services; environment and small and medium enterprises.
Ernani Torres points out that, despite the setbacks in recent years, the quality of BNDES assets remains high, guaranteeing its solvency and opening space for rethinking its actions. In this sense, the author proposes: i) exempting the BNDES from the payment of certain taxes and from transferring dividends to the Union, as happens in other countries; ii) creating the Infrastructure Letter of Credit, issued with coverage from operations under Law 12431 (incentive debentures), allowing the BNDES to compete for long-term funds to finance infrastructure; iii) shortening the processing time and easing the requirements for companies with good financial risk; iv) creating a program of firm guarantees for the portion of incentive debentures' offers not served by private banks; v) the Bank acting as an important dealer in the incentive debentures' market, promoting the liquidity of these securities in the secondary market.
Some authors, like João Furtado, warn that certain criticisms directed at the BNDES —such as favoring specific groups— can and should be answered quickly, with the reinforcement of governance, including independent councils and counselors with defined mandates, impediments to mandate renewals, and operating rules that make public the minutes of board and councils meetings.
Appropriate funding conditions to (all sizes of) companies' efforts to build technological capacity should be the utmost priority guiding BNDES activities. Thus, productivity would become the Bank's main mission. The author suggests, for example, the creation of Finame Produtivity and an investment fund for technology-based companies with innovative technologies that could serve to substantially increase the productivity of the economic system. Programs to support firms' internationalization, Low Carbon Economy and energy transition complete the list of suggestions.
The study by Filipe Sousa and Gianmarco Ottaviano shows the BNDES' ability to mitigate the credit restrictions imposed on Brazilian companies in the industrial sector and to leverage their productivity, although it has not been able to give the supported companies a superior performance in terms of productivity. If development policy is to raise economic productivity, the BNDES needs to favor cutting-edge technologies, that is, the Bank's credit operations should present parameters that reinforce the adoption of modern technologies.
Lastly, the work of João Carlos Ferraz maintains that the BNDES has the shape and function of an institution dedicated to pro-development missions. It suggests that the authorities should assess whether the extent of benefits grated to the BNDES are adequate to its missions; also, they must guarantee that the scope of the Bank's operations remains diversified to dilute risks, that its countercyclical action is preserved, and that the BNDES acts not in opposition but in partnership with the local financial industry. Finally, developing policy assessment tools is critical.