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Story Publication logo December 16, 2013

A Bank That May Be Too Big for Brazil


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Wind energy in Brazil. Juan Forero, 2013.

RIO DE JANEIRO, Brazil — To dodge the global economic crisis, Brazil cranked up its spending, expanding subway lines and shipyards for oil platforms while building hydroelectric dams and stadiums for soccer's 2014 World Cup.

There would be no austerity as in Europe, Brazil's leaders pointedly promised. And Brazil had a well-oiled machine to keep its economy humming: the state development bank, an institution little known outside this country but central to policymakers here.

The bank has loaned a third of a trillion dollars since 2010, twice the amount the World Bank provided to about 100 countries combined, with much of the bounty going to the mining, agriculture and construction giants that are pillars of Brazil's economy.

Economists at BNDES, as the bank is known, say the benefits are felt evenly across Brazil: low unemployment and an economy that was kept on track while others seemed to careen out of control.

But the global downturn is finally being felt in Latin America's largest economy. And critics say a big part of the problem is Brazil's strategy of doling out loans worth billions of dollars from the bank to the country's richest and most politically connected companies.

Economists and opposition leaders say this focus on Brazil's "national champions" neglects smaller, nimbler firms that are developing new technologies and products to diversify a commodity-dependent economy. They also say that BNDES's huge loans are fueling inflation that the Central Bank of Brazil must scramble to control.

Sergio Lazzarini, who works at the Insper business school in São Paulo and writes about BNDES, said the bank's role has become more difficult to justify in the face of an economy completing its third year of disappointing growth.

"Despite these trends," Lazzarini said, "the bank has become more aggressive, bigger, with more direct transfers from the government to the bank," a reference to the treasury funds and payroll tax revenue used for loans.

At the bank's fortress-like offices in bustling downtown Rio, executives and economists speak proudly of a 61-year-old institution that has backed companies in the past decade whose growth helped make Brazil the world's seventh-largest economy.

João Ferraz, BNDES's vice president, called such projects central to an economy that posted solid growth in the 2000s, capped by a blistering 7.5 percent expansion in 2010.

"Can you build a hydroelectric plant with small firms? Can you build a pulp plant or a car factory with small firms?" Ferraz said.

In approving loans, the bank considers the quality of the companies and the benefits of the projects, he said, calling critics misguided in accusing BNDES of cronyism. He spoke about one well-known recipient of BNDES loans, the construction giant Odebrecht, which has 175,000 employees in 26 countries and built BNDES's modernist high-rise headquarters.

"I am not friends with Odebrecht," he said of the São Paulo-based conglomerate. "I am friends with the good projects of Odebrecht."

But Adriano Pires, a prominent government detractor and director of a consulting firm specializing in energy, said the bank's disbursements — $81 billion this year, its biggest outlay ever — are generating worrisome levels of debt and an outsize role for the state in the economy.

"What is the policy behind this?" Pires said. "It's an ideology that holds that the state has to have a strong role in the economy."

Indeed, in exchange for loans, BNDES has acquired a minority stake in dozens of private companies, giving the bank's executives a say in their operations.

The bank also remains opaque about how it chooses which companies to shower with loans, said João Lopes Pinto, coordinator of the group More Democracy, which has met with bank officials to lobby for more transparency.

Bank executives say they are working to be more forthcoming, although they say regulations prevent them from providing details about loans.

A boon for big borrowers

With disbursements having gone up by a factor of five over the past decade, Pinto said, there has been more of a windfall for big borrowers such as the São Paulo-based meatpacker JBS.

A decade ago, JBS wasn't even among Brazil's top 400 companies. But BNDES provided $4.4 billion from 2008 to 2010, essential as the company went abroad to acquire Swift, National Beef, Smithfield Beef and Pilgrim's Pride. That made JBS a worldwide leader in beef production.

In 2010, JBS was also the largest contributor to President Dilma Rousseff's campaign, donating $4.7 million, according to a report on BNDES and Brazil's economy by Mansueto Almeida, an economist at the government-funded Institute of Applied Economic Research. He questions what Brazil has gotten out of supporting the company in its heavy expansion into the U.S. market.

"I don't see any kind of social outcome or social return that would justify BNDES in promoting this firm," Almeida said. JBS declined to comment.

Almeida said the problem is that BNDES often acts as an investment bank, not a public institution focused on fostering social development.

In contrast, Almeida said, fast-developing South Korea boosted dynamic companies that developed electronics, among them Samsung.

"In Brazil, we don't do that," Almeida said. "We give you subsidized credit so you can do the same thing or go overseas and buy your competitors."

Ferraz, the BNDES vice president, said such assertions overlook an increasingly diverse portfolio. He said the bank is focusing more on companies with gross revenues of $40 million or less, in categories the bank calls micro, small or medium-size. In 2009, 21 percent of loans went to those companies; this year, 37 percent has been provided to them, according to bank documents.

The bank is also accelerating spending on projects that economists say the country desperately needs, such as energy generation plants, highways, ports, airports and other infrastructure that "will be a big driver of economic growth," said Nelson Siffert, BNDES's superintendent for infrastructure.

Still, the bank's relationship with giant companies and well-connected billionaires has created problems for its executives and government.

Although BNDES was not explicitly one of their targets, protesters who staged huge nationwide rallies in June directed much of their ire at government policies they said benefit the elite in a country of grinding income inequality.

One was would-be oil baron Eike Batista, a flamboyant billionaire whose EBX Group received more than $4 billion in loans, prompting him to call BNDES "the best bank in the world." But now his empire is collapsing, and opposition leaders are questioning BNDES over its support of his money-losing companies.

"The money cannot go to a few lucky ones," said César Colnago, an opposition lawmaker in Congress.

Batista's office did not return calls seeking comment.

Dependent on BNDES

To be sure, credit is expensive in Brazil and BNDES fills that need, particularly the huge loans needed by companies such as the state-controlled Petrobras oil giant and Vale, a mining company that has $5 billion in outstanding loans from the bank.

Vale has grown into a $46 billion company employing tens of thousands of workers.

Sonia Zagury, global head of finance at Vale, said BNDES's role "in the Brazilian economy is an important one, and they are an important partner for Vale."

But analysts say there is another downside to BNDES's big spending: It fans inflation, which has remained stubbornly high at just under 6 percent a year.

To keep it under control, the Central Bank on Nov. 27 raised its benchmark rate to 10 percent. Such a high interest rate — the highest of any developed country — is believed to crowd out the development of private lenders.

That leaves companies perpetually dependent on BNDES and its cheaper loans, according to Almeida, the economist.

"No bank, no matter how smart it is, can compete with a bank that receives subsidies from the government," he said.





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