Skewed financial arrangements between the government and Brazil’s powerful state development bank are big contributors to distortions in policy making and Brazil’s loss of competitiveness. That’s the controversial finding of a senior economist who is working for the IDB and Brazilian government to assess Brazilian tax arrangements.
The scheme is as follows: the Treasury funds the development bank, the BNDES, which in turn lends at subsidized long-term rates. The problem is that the Brazilian government pays more than 10% - currently five-year sovereign debt is yielding 10.72% - to borrow whereas the BNDES lends at 6% plus commission and faces the possibility of corporate bankruptcies. If the amounts were small, this would matter less, but last year the BNDES lent $73bn last year compared to $43bn by the World Bank. Government funding of the BNDES is being undertaken off balance sheet so as not to balloon out Brazil’s debt level and that is distorting published government debt numbers.
The trenchant critic is no less than Teresa Ter-Minassian, well known for leading an IMF mission in the 1990s to negotiate a Brazilian rescue package. She believes that the lending is distorting the monetary and fiscal policies of the country and hurting competition. The sleight-of-hand means Brazil is unlikely to meet fiscal targets, she notes. The criticism is all the more painful as she is funded by the IDB, which is receiving monies from the Brazilian Ministry of Finance.
This is a theme that Brazil’s leading investor, Luis Stuhlberger, of the internationally-renowned CS Hedging Griffo asset management, has highlighted as one that will continue to be a drag on Brazil’s government finances. The government’s reaction? It has angrily turned on the messenger.