Government squirms as development bank put under the microscope

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.

About admin

I've been researching and writing on Brazilian financial markets, industry and economy since 2006 for a wide range of specialist media, consultancies and investors. Before that I spent over 10 years in London and New York writing for and editing magazines and journals dedicated to finance, investment and economics in developing markets, mostly for the Euromoney Institutional Investor group and Thomson Financial. Areas of coverage Below are samples of areas that I cover and some of the common themes that I investigate. Capital markets BM&FBovespa markets *capital raising trends: via equities (IPOs and secondary issuance), debt and loans *the asset management industry: legislation and coverage of the key hedge, pension and investment funds * corporate governance: how the regulator is seeking to strengthen best practice and limitations * debt markets: the nascent corporate markets, attempts to boost liquidity and new insturments. * private equity market: why this market has been so successful, who’s involved. *electronic, high frequency trading and alternative trading platforms: what does the future hold? Banking *credit: the growth of consumer and business credit and competition between banks and models *Public versus private: the role and market share of public and private sector banks and the politicization of the industry * internationalization: which Brazilian banks are expanding overseas and where * investment banking: the growth of the domestic market and who’s winning which mandates *regional banks and development banks: what role they play in the industry and how they compete Mining *licensing: the complex process of obtaining environmental, water, land and operating licenses at a state and federal level. * capacity: the feasibility and sustainability of capacity increases * financing: how miners are raising finance in Brazil and abroad *competition: the interplay Vale, MMX and junior miners *logistics: rail, road and port connections Oil and gas: the fund raising issues related to the massive of pre-salt (link) Multilatinas: Who are they and how and where they are expanding Meatpacking: Are debt burdens sustainable, what are the different business models for areas such as branding and distrbution Agriculture: How are farms consolidating, what are environmental risks, how can foreign investors be involved. IT and software: Can Brazil take on India and build a viable long-term IT industry? For more information on clients and work, please see the media and consultancy sections.
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