A reform of the way that Brazil’s national development bank BNDES offers credit will open the door to securitization of its financing, Dyogo Oliveira, Brazil’s planning minister, told Global Markets. In an exclusive interview, he said that securitization would lead to a deepening of capital markets. “The BNDES will rather act as a development bank, instead of having to keep dealing with the projects until they are completed,” he told Global Markets.
The main purpose of the reform is to beef up the capital markets and encourage securitization of BNDES loans. “They want to slowly move away from this role of the BNDES as the main provider of long term financing for the country, and they want to kick start the private capital market, which is another [piece of] good news,” said Ramon Aracena, Latin America chief economist at the Institute of International Finance.
Brazil announced an overhaul of the credit market on Friday to reduce to scope for subsidised credit that is mainly channelled via the BNDES. Subsidies will be reduced from next year and the government intends to phase them out within five years.
“To me, it is absolutely a key issue,” said Francis Repka, chief executive of Société Générale in São Paulo. “It is an issue of the efficiency of resource allocation. It goes in the right direction towards a more productive, competitive economy.”
Earmarked credit is equivalent to around half of total credit activity, following a strong increase under the previous governments of Lula da Silva and Dilma Rousseff. BNDES loans are currently granted at government-set low, long term interest rates.
“We have long standing problems in the credit market and we need to address them,” said Brazil’s central bank governor Ilan Goldfajn in a recent interview. “Our view is that the more lending you have at subsidised rates, the more expensive are the free market rates. It is like when you to go to the movies and some people pay half price, then the full price has to be more expensive,” he said.
Rates reform
The long term interest rates that the BNDES charges for its loans, known at the TJLP and currently at 7%, will be replaced by a replacement rate called TLP, which will be closer to the 12.25% rate at which the Treasury issues bonds.
“This reform is very important for fiscal and for monetary policy reasons. When you have a subsidised rate, someone has to pay the subsidy. It is the taxpayer that pays it, at the end of the day. The Treasury raises money by issuing debt at market rates and then transfers funds to the BNDES, which grants loans at the lower subsidised rate. There is a fiscal cost,” said Marcelo Carvalho, Latin America chief economist at BNP Paribas.
“It also helps monetary policy. In the past, the strength of monetary policy was not as strong as it could be, because whenever the central bank changed the overnight [benchmark] Selic rate, nothing happened to the TJLP [subsidised rate]. So a big portion of the economy was not sensitive to monetary policy at all. Now, this will change because the new TLP rate will eventually be linked to the long term market rates, and will be more sensitive to the cycle,” he said.