Could Covid-19 spark a rebirth of Brazil’s development bank?

. May 21, 2020
Could Covid-19 spark a rebirth of Brazil's development bank? Photo: Alina Bu Photo/Shutterstock

Over 68 years, the Brazilian National Development Bank (BNDES) established itself as the most important vessel for infrastructure funding in the country. The bank, however, has been under pressure since the 2014-2016 crisis — which coupled with accusations of political misuse of its funds. Now, amid a pandemic, the BNDES once again becomes instrumental, as one of the government’s main tools to foster investments that may mitigate the economic impacts of Covid-19.

Since the Michel Temer administration (2016-2018), the BNDES has been helping to fill the hole of Brazil’s public accounts by returning billions to the Treasury — an advance of transfers from the Workers’ Party administration, under which the bank’s credit concessions boomed.

However, it has also faced allegations of poor management and involvement in corruption schemes and, ultimately, of being a gear in the so-called &#8220;<a href="">fiscal pedaling</a>&#8221; that led to former President Dilma Rousseff’s ouster in 2016.</p> <p>And while the transfer of funds remained under Jair Bolsonaro’s administration, coupled with his pledge to “open the black box of the BNDES” — an investigation which came up empty-handed — it is now one of the main instruments used by the Economy Ministry to provide liquidity to Brazil’s ailing economy. In March, the bank announced <a href=";utm_medium=social&amp;utm_campaign=organico">BRL 97 billion in funds</a> to boost markets and support small and medium-sized enterprises (SMEs) amid the crisis. These measures included <a href="!ut/p/z1/1VTBcpswFPwajrJkEMbujSbEbozj6bSubS4ZIQSoNRKRBE789ZUcH9KmcaaTSWfKQaCnp337VlpgBjcwE6TnFTFcCrKz8202uk0n82SGlyhF4VeM4ssgwqsoQfOxD9fHBPTCEyOYPd0_vUx9FKfhFbr6fDNNYh9-gxnMqDCtqeE2FwXTt1xow01Hjww8VMuGeYg3rWJCEw8JaTjlRHuISmFYV0gX64kGXLgFw903lQ1oiXKpLaFEgiM26DnJ-Y4fSAOIYaLgDRNGalAwoElnRwYaIjq75Pa4uatbPWbkimi-Y1xJ7Vi3lBdwS8mIIjrBwM_xEGCKKZiUxRiMRnkRDSfhuAzxSaUzMmbnRVy7ek8Rlp-CBMWzizTEyXw4nQSnhDMYW8sheplDANc9Z3u4ElI19uS__GWLs9cqLP03VngFPnxf-Ohd4TF-I_z1r_fj-Q2zTvbV4mJRWVhiamuWUsLNvzeO5cG_391lsbW98--9gZv_yPdW52on88dfYyzyYGwFVaxkiqlBp2y4NqbVHzzkof1-PziWH1SyH-TKRlpLv5XKuAY1N-x5m3_CraW2Kv0OB9tm1YyDB_CjXCQB3l73h4834PTK8ofgkLL1T2M52GE!/dz/d5/L2dBISEvZ0FBIS9nQSEh/">special credit lines for the health sector</a>, suspending debt interest payments for six months, and a special loan program to support SMEs&#8217; payrolls. As of May, roughly BRL 13 billion had been deployed, supporting companies that employ 2.2 million people, according to the bank&#8217;s calculations.</p> <p>In the view of professor Joelson Sampaio, coordinator of the economics course at think tank Fundação Getulio Vargas, the measures “increase the importance of the bank for public policy.&#8221;</p> <p>&#8220;This turnover may boost its social role, specially by diminishing the effects of the crisis for companies,&#8221; he told <strong>The Brazilian Report</strong>.&nbsp;</p> <p>In addition, BNDES chief executive officer Gustavo Montezano announced the bank will provide a bailout package to leading Brazilian airlines Gol, Latam, and Azul, in an operation coordinated with private banks for an undisclosed amount. It is speculated that the agreement will reach up to BRL 6 billion, of which 60 percent is provided by the BNDES, 10 percent by banks, and the remainder by capital markets.&nbsp;</p> <p>As we <a href="">reported on May 15</a>, the plan’s conditions include an obligation to use the resources for their Brazilian operations — not their financial creditors — and having equal conditions for all companies.&nbsp;</p> <p>The bank will also take part in the government’s plan to bail out electricity companies, which are suffering with higher default rates and decreased consumption. Alongside a pool of private institutions, the BNDES will provide loans totaling an undisclosed amount, which associations in the sector have estimated at around BRL 14 billion.&nbsp;</p> <p>As <a href=",consumidor-vai-dividir-com-empresas-custo-de-socorro-para-setor-eletrico,70003307193">reported</a> by newspaper <em>O Estado de S.Paulo</em>, the loans are a way to diminish the impacts of the bailout on consumers. Back in 2015, when the Dilma Rousseff administration approved a rescue plan to the sector, all the costs were paid by consumers, causing increases of up to 50 percent on energy bills. Now, the sector itself will bear the costs, while customers will only cover the drop in consumption.&nbsp;</p> <p>Bailout packages with automobile manufacturers are also in progress, and according to BNDES management, the bank would be willing to help retailers as well.&nbsp;&nbsp;&nbsp;</p> <h2>Development Bank: back to black</h2> <p>Part of the bank’s ability to bail out Brazilian companies came from the restructuring that has been going on since 2017. At the time, President Temer replaced the BNDES’ subsidised interest rate with another index using public bonds as a benchmark. Therefore, the new rate not only increases the effectiveness of monetary policy, but it also ensures that workers&#8217; support fund FAT — among the main sources of funding of the BNDES — doesn’t incur in default.</p> <p>The bank’s hefty profits have been earned through divestments and selling off assets. After recording the largest annual net profit of its history in 2019 (BRL 17.7 billion), it kicked off 2020 by earning BRL 5.5 billion, over four times as much as in Q4 2019.</p> <p>The strategy of divesting listed companies created BRL 8.1 billion in revenue over the past quarter, boosted by the BRL 22 billion generated from the sale of part of the <a href="">bank’s stake in state-owned oil company Petrobras</a>. The importance of reducing exposure to volatile assets, said Mr. Montezano, became even clearer amid the crisis, when BNDES lost BRL 12 billion in a single day due to a market crash.</p> <p>According to the press, BNDES’ 21.3 percent stake in meat-processing company JBS is the next in line for sale. However, as highlighted by Mr. Montezano, while the bank intends to keep reducing its stakes in listed companies, the move shall happen “when the stock markets offer conditions and prices for such a move.”</p> <h2>Calculated risks</h2> <p>In this sense, building a stake in airlines through convertible debentures seems to go against this trend of deleveraging, harming back to the bank’s past of investing in companies perceived as being “strategic” to the federal government. Mr. Montezano dismisses this possibility by claiming the bank is acting alongside society, in the form of banks and capital markets, which will decide how the aid will take shape for each company.</p> <p>For Giovanni Beviláqua, a Ph.D. in Economics and analyst at Sebrae, it is important to make sure “the measures are circumscribed to time and space. Emergency situations must be addressed, but it is important to avoid the measures having posterior negative effects,” he told <strong>The Brazilian Report</strong>.</p> <p>Another concern regarding the Covid-19 operations is that, by wading into the SME segment — which are companies more liable to default — the bank might put its rebalancing measures at risk. In 2020’s first quarter alone, BRL 1.7 billion were provisioned as companies’ credit ratings are being negatively influenced by the looming recession.</p> <p>Professor Sampaio reckons that the bank is operating in sectors where private institutions have no desire to step in, but believes that “it makes sense, because it’s the purpose of a public bank. Also because if these companies are in trouble, it affects the economy as a whole.”</p> <p>Mr. Bevilaqua agrees with this vision, but doesn’t believe that the bank is at higher risk, since “the risk is being shared among all agents,” such as the National Treasury.&nbsp;</p> <p>In that respect, with the transfer of the remaining funds to the National Treasury suspended, it is actually the federal government that may be in hot water. Since 2015, BNDES returned <a href="">BRL 409 billion</a> to the treasury, which helped reduce the public debt to 75.8 percent of the GDP <a href="">by the end of 2019</a>.

Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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