By Christopher Swann
NEW YORK, Oct 23 (Reuters Breakingviews) - Brazil's state bank, BNDES, can learn from its little brother in Chile. Most of the $80 billion the Brazilian development lender hands out every year goes to big firms like Vale or Petrobras , which could easily borrow from private sector lenders. In a new report, the OECD says that's bad policy and should be phased out. CORFO, Chile's equivalent, does a better job directing resources where they're actually useful.
Brazil's fallen billionaire Eike Batista once called BNDES the best bank in the world. But he was a recipient of loans at interest rates only around half the 10 percent or so the Brazilian government pays to borrow the funds it passes on to the bank. For Brazilian taxpayers and the economy it's a different story. Ballooning scale is the most obvious problem. BNDES now lends about three times as much each year as in 2007, making its disbursements twice as big as the World Bank's. Because of the interest rate subsidy, that's a growing drain on Brasilia's resources.
On top of that, almost two-thirds of BNDES loans go to relatively large companies, defined by the OECD as having annual revenue above 90 million reais ($41 million). For example, BNDES lent 3.9 billion reais to mining giant Vale, an $85 billion company, for a single project last year. Many of these loans are unnecessary, since ordinary banks will lend to borrowers like Vale. Aside from the cost to the government, loans like this hinder the development of capital markets and handicap private banks, which can't lend as cheaply.
On the opposite coast of South America, the far smaller CORFO dedicates 96 percent of its resources to companies with sales of less than $2 million a year. These firms could struggle to borrow any other way. Moreover, to avoid crowding out private sector lenders CORFO provides 90 percent of its support as guarantees rather than direct loans.
For an emerging economy Brazil already suffers from low rates of investment, which run around 17 percent of GDP as against, say, 25 percent in Chile. President Dilma Rousseff needs to boost that while also reducing the cost of subsidized lending. Making BNDES both smaller and smarter would be a start.
- Brazil's state-run BNDES, the largest development lender in the Americas, is crowding out private sector banks from corporate credit markets, and the government should phase out financial support for the bank, the Organization for Economic Cooperation and Development said on Oct. 22.
- In a survey of Brazil's economy, the OECD also recommended the government instruct BNDES to finance badly needed infrastructure projects, small and medium enterprises and innovation.
- Rio de Janeiro-based BNDES is the main source of long-term domestic financing of large Brazilian companies that have used some of the money to expand abroad. The bank's outstanding loans are equal to 6 percent of Brazil's GDP, the OECD said.
- OECD report link: http://link.reuters.com/cyz93v
- Reuters: Brazil's BNDES crowding out private banks from loans - OECD
- For previous columns by the author, Reuters customers can click on
(Editing by Richard Beales and Emily Plucinak) Keywords: BREAKINGVIEWS BRAZIL/BNDES
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