BNDES export credits back on the agenda

Sep, 18, 2023 Posted by Gabriel Malheiros

Week 202338

The advancement in the Chamber of Deputies of a constitutional amendment bill establishing that loans from federal state-owned banks require Congress approval when involving external operations intensifies the debate on the topic among manufacturing industry representatives, experts in foreign trade and public accounts, and legislators.

While some defend the need for an industrial policy that involves financing the export of goods and services, others point to the need to discuss the role of BNDES through greater participation of the financial market in the form of credit to large companies.

There is an understanding that the issue has become an ideological dispute pitching the government, which defends greater participation by the BNDES, against the opposition, which wants Congress to have greater control over banks belonging to the Brazilian state.

“Brazil was once a major exporter of services, and BNDES played an important role in this,” Ultra group shareholder Pedro Wongtschowski, one of the leading manufacturing representatives, told Valor. The businessman noted that between 1998 and 2017, the bank financed the equivalent of R$22 billion in exports. “Today, this is almost zero.” The Federation of Industries of the State of São Paulo (Fiesp) and the National Confederation of Industry (CNI) follow the same line.

For Mr. Wongtschowski, the current period is the “right time” to discuss the topic. He said Brazil has a “fantastic trade surplus,” which provides the opportunity to conclude trade agreements and implement a policy to modernize the national manufacturing industry.

According to Mr. Wongtschowski, this will require commercial opening to allow imports of instruments and machines that increase factory productivity. It is also an opportunity to resume financing for the export of services, through which it is possible to trade knowledge, almost always associated with the export of industrial goods. “An engineering project uses equipment, facilities, and knowledge available in Brazil and has a huge impact on the industrial sector.”

The businessman said the constitutional reform under discussion raises fears that it will create obstacles to credit exports by BNDES. He argued that this type of financing requires the action of a state-owned bank because the financial market cannot offer competitive interest rates.

Congressmen Mendonça Filho (Union Party) and Daniel Freitas (Liberal Party) filed the bills last March, and both proposals are being analyzed together. According to Congressman Mendonça Filho, the Workers’ Party (PT) resisted to discuss the issue in the Chamber’s Constitution, Justice, and Citizenship Committee, which PT member Ruy Falcão chairs. However, the government was defeated in its attempt to take the project off the agenda, and it recently progressed through the committee with the support of the governing coalition.

One of the bills, under the code PEC 3/2023, refers to BNDES’s operations abroad, determining that Congress should authorize such credit operations by state-controlled financial companies. The project could prevent BNDES from financing public works and services abroad and affect international loans from Caixa and Banco do Brasil.

“We want to avoid what happened in Cuba, Venezuela, and Mozambique. I see clear pressure from BNDES to resume financing, and I just hope that it is not a decision supported by [BNDES President] Aloízio Mercadante,” Congressman Mendonça Filho said, referring to BNDES-supported export operations from 1998 to 2017 which resulted in default.

According to BNDES’s website, Venezuela missed $740 million in payments, Mozambique missed $122 million, and Cuba left $261 million unpaid, totaling $1.1 billion until June 2023.

According to the bank, in the same 19-year period, around $10.5 billion were disbursed for projects in 15 countries, with $12.8 billion returned in payments by September 2022, covering the debts’ principal and interests.

The lawmaker said the amendment aims to establish parameters but that he favors companies’ insertion into the international markets. “This is not a narrative war. I am a liberal, and we can discuss the bill, but I believe there is an ideological bias on the part of the government.”

For economist Zeina Latif, managing partner of Gilbratar Consulting, it is necessary to better define BNDES’ role in financing exports. “It is not a dogma whether the BNDES can or not. It can. Other countries finance. However, you need a technical base, analyze what you already have, and create a design.”

Ms. Latif thinks it is crucial to debate the best way and use of development bank resources to finance exports. “It is important that you are not [concentrated] on the big groups that can receive market financing. Is it the best use of the resources? Financing a large group that can raise funds in another way or a small one? It would stimulate these [small and medium-sized] companies to invest and seek innovation. These companies employ a lot. In other words, there are second-order effects that are benign.”

There are flaws in financing exports, including in countries with a more sophisticated financial system and where companies may provide guarantees. “The role of BNDES is to correct market failures. And the lack of credit for smaller companies ends up being a barrier. There is a whole cost of looking for a market, looking for partners, and adjusting the product to the profile of external and regulatory demand,” Ms. Latif said.

BNDES director of Productive Development, Innovation and Foreign Trade, José Luis Gordon, told Valor that the bank does not finance countries and claimed that it might support large companies as a way of helping small and medium-sized firms that complement the industrial chain.

“The government wants to help companies expand their space in the international market. All major developed countries do this, including helping large groups,” he said. For large companies to strengthen themselves in the international market, according to him, support from the bank is needed.

“Default is part of it. It’s a risk, but in the bank’s history, from 1991 until recently, around $100 billion in exports were financed, with around $1 billion in defaults,” he said.

The government intends to submit to Congress this year a bill, currently under discussion with the Federal Court of Accounts, to approve BNDES’ best practices in financing exports, which includes goods and services.

Evaristo Pinheiro, a partner at Barral Parente Pinheiro law firm, argued that official export credit is “a state business” that essentially serves to fill a market gap. “The world does this because it considers it advantageous. Although this understanding is not consolidated in Brazil, there is great clarity that having official export credit is beneficial for exports, the industry, and job creation. It’s like that in China, India, Europe, and the United States.”

The market gap, he explained, is in large projects. According to OECD data cited by him, official export credit goes mainly to the export of vessels and aircraft or infrastructure projects, such as hydroelectric, thermoelectric, wind, and solar power plants. “That’s where banks don’t come in because the risk is too high, and the deadlines are too long.”

The operations that exist in the world today, according to him, developed from a kind of gentlemen’s arrangement under OECD parameters. These parameters include limits to financing terms, financing percentages, and interest rates. “Over time, countries that use this arrangement have sophisticated their products by offering unconditional guarantees for export, for example.”

There are also, within the arrangement, countries that offer so-called concessional loans, provided under more beneficial conditions, such as rates below the OECD-established standards, in a particular context. “Brazil does not provide this type of credit, but it also does not have the fiscal conditions for it.”

However, he added that he disagrees with the argument that Brazil must take care of other “ills” before prioritizing export credit. “Brazil has an industrial park in some niches such as aircraft and defense. The countries that compete with us are developed countries, besides China and India. In comparison with them, Brazil’s average disbursement is at the bottom.” Brazil, he argued, is among the 15 largest economies in the world and should have a compatible level of official export credit.

Source: Valor Econômico

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