Brazil's Development Bank BNDES Faces Reform

08/30/2017 - 11h39

When Brazil's development bank, BNDES, attempted to change the management of scandal-hit meatpacker JBS this month, it ran into surprisingly staunch resistance. 

Wesley Batista, one of the two brothers who run JBS, the world's largest protein company, admitted earlier this year in a plea bargain to a scheme in which executives bribed nearly 2,000 politicians. His sibling Joesley even allegedly discussed kickbacks with President Michel Temer. 

BNDES, which is JBS's second-largest shareholder and one of its biggest lenders, wants to sue Mr Batista and remove him from the board, but the cocky butcher from Brazil's mid-western cowboy state of Goais is having none of it. 

"Up to this moment, there are no objective elements, based on professional studies and evaluations, that conclude that Mr Wesley Batista has caused damages to the company," JBS said in a statement. 

For critics of BNDES, the dispute highlights the deep flaws of an entrenched system of subsidised government lending that underpins Latin America's biggest economy. 

BNDES helped to create JBS over the past decade, pumping R$8bn ($2.5bn) in loans and equity into the company and helping it expand overseas into the US, Australia and Europe as part of a state policy of creating national champions. 

Under different governments in Brazil's former ruling Workers' party, which ruled for 13 years until former President Dilma Rousseff was impeached last year for manipulating the budget, the BNDES grew bigger than the World Bank as the main provider of long-term finance in Latin America's largest economy. 

The bank lent money to companies ranging from JBS to those owned by Jorge Paulo Lemann, Brazil's richest man and one of the controlling shareholders of AB InBev, the world's largest brewer, at interest rates sometimes half of those of the central bank's benchmark Selic lending rate.  

"This very big BNDES that we constructed over the past decade is part of an old vision of Brazil that assumes that development requires government co-ordination, protection against competition and subsidies to private investment," said Marcos Lisboa, president director of Brazilian business school Insper. 

While the bank's staff say their credit decisions follow strict technical criteria and they pride themselves on its low default rates, analysts say BNDES was able to pick the strongest borrowers in the economy because it was offering cheap loans. The proportion of BNDES loans that a group received also often corresponded with the size of its political donations, studies showed. 

People familiar with the bank's practices say that staff received generous annual bonuses of up to four and a half months' salary based on the volume of lending they were able to make. This incentivised them to offer more loans to big borrowers, a former employee said. 

"Some of them were making R$60,000 for lending money at the TJLP," he said, referring to BNDES' standard lending rate, which is currently at 7 per cent compared with the benchmark Selic rate of 9.25 per cent. "The salary of a superstar." 

When Mr Temer took power last year, he appointed a respected manager, Maria Silva Bastos Marques, to try reform BNDES. But she faced resistance from within the bank and from powerful business lobbies to her attempts to quell the flow of cheap credit, the person said. 

"A huge amount of pressure was brought down on top of Maria Silva," the former employee said. 

She was replaced in May by Paulo Rabello de Castro, from the state statistics agency IBGE. While he has flip-flopped on whether the bank should tighten its lending policies, the Temer government has continued with attempts to reform the bank. 

The most important measure is to change BNDES' standard subsidised lending rate. This is randomly set by an essentially political body, the national monetary council, which is headed by the finance minister. 

Under the reforms, the new lending rate, to be known as the TLP, would be set based on the five-year treasury rate, a market-based instrument. The changes, which are due to be voted on by the senate next week, would be phased in over five years starting in January. 

This would have multiple benefits, eliminating the subsidy and allowing the private sector to begin to compete to offer alternatives for long-term finance, analysts say.

"The bank, most probably, will concentrate on infrastructure," said Fabio Giambiagi, planning and research superintendent at BNDES. 

While business complains that Brazil's high interest rates make BNDES loans a necessity, policymakers say Brazil's high proportion of subsidised loans, which comprise half of the banking system, push up market rates.

This is because the central bank when implementing monetary policy to counter inflation must compensate for the large flow of cheap subsidised money by lifting market rates even higher. 

"It is always a catch 22," said Ilan Goldfajn, president of Brazil's central bank. "They say we need the subsidies because interest rates are high but interest rates are high because we have all these subsidies. So we need to break this vicious cycle." 

Copyright The Financial Times Limited 2017