The blueprint for BNDES is for a development bank that partners with the private sector to facilitate more socially beneficial projects while using less capital. Eliane Lustosa, BNDES director of capital markets, is at the forefront of this challenge.
The dominant theme in Brazilian financial circles remains the outlook for pension reform. It is a key issue for future fiscal sustainability, but, even if passed, it will have a limited impact on the government’s finances in the coming few years.
What is less discussed and will have a much bigger impact on the financial and economic health of the country in the next five years are changes already made to the country’s state development bank, BNDES.
According to estimates from analysts at Capital Economics, it is responsible for about 15% of total lending to the private sector and has a balance sheet similar in size to that of the World Bank. So the substantive changes that have been implemented in recent years will have a direct and large impact on the economy.
The changes include those that will encourage small and medium-sized enterprises, innovation and technology; reduce the level of its disbursements into the economy and thereby reduce the ‘crowding-out’ of private finance; improve the functioning of monetary policy and lower the nominal level of the country’s base rate, the Selic; increase the participation of domestic institutional investors in long-term financing through the development of new capital market instruments; and increase both the effectiveness of the deployment of private and public capital.
The headline change was the way the interest rate charged by BNDES is formulated. Formerly the bank used a rate called the TJLP, which was set on a quarterly basis by the National Monetary Council, whose members include the head of the central bank and ministers of finance and planning.
That rate was set at a big discount to the Selic, averaging 6% since the start of 2013, compared with a yield on five-year local currency bonds of 12%. The difference between the rate at which the government financed itself and market rates represented an effective subsidy to those companies granted TJLP loans.
Capital Economics calculates the impact of the TJLP in the past has been equivalent to about an added 100 basis points on Selic and has aggravated the country’s attempts to lower the country’s high interest rates. New rate And so over the next five years, the bank will migrate to a new rate called the TLP, equivalent to the five-year NTN-B (inflation-linked) bond yield.
That will still be lower than the private sector will charge companies, but the discrepancy will be smaller and – crucially for BNDES director of capital markets, Eliane Lustosa, who is working towards ending the crowding out that the bank has on private sources of finance – it will be more transparent.
“Once the bank has an interest rate that is comparable to the risk-free rate, it will be clear and transparent if there are any subsidies in that rate – with TJLP it is difficult to say,” she tells Euromoney.
“We can still provide subsidies, but it is about being transparent about that subsidy. “We will be able to see the difference in the rate that we are charging the entrepreneur and compare it to the rate they would have in the market. That will make it easier for society to understand the difference.”