? BNDES CEO says Brazil’s next president will have to introduce a fiscal plan very quickly to calm markets.
? BNDES is looking to end its reliance on government funding, while also increasing its disbursements.
? Brazil’s lower interest rate environment is here to stay and “changes everything” for banks in the country, CEO says.
Just five years ago, Banco Nacional de Desenvolvimento Econômico e Social, Brazil’s national development bank, had a loan book bigger than that of the World Bank, largely driven by a vigorous expansion funded by federal resources. In the years that followed, which included a lengthy recession, the state-run institution’s level of disbursements has dwindled rapidly, falling to about 1% of Brazil’s GDP from 4.5% at its peak in late 2013.
But with Brazil now in a nascent economic recovery, BNDES CEO Dyogo de Oliveira believes the development bank is primed to grow once more — and this time, it intends to do so without the help of the nation’s National Treasury. The bank has repaid some 280 billion reais to the Treasury since 2015, and it is aiming to repay the remaining 250 billion reais by 2040.
Oliveira, a former planning minister who was appointed to the CEO role in April by outgoing President Michel Temer, believes BNDES can return to a disbursement level equal to 2% of Brazilian GDP in the next “two or three years,” and that it can do so without Treasury resources. The company expects investments to hit some 1 trillion reais over the next four years, the biggest expansion in investment since 2015.
BNDES’ future role in Brazil’s economy, as well as its size, have been among the campaign topics of many of the candidates vying to become the country’s next president ahead of the Oct. 7 first-round election. Recent polls suggest that the voters will send far-right candidate Jair Bolsonaro and far-left Workers Party candidate Fernando Haddad to a run-off election later in the month.
While Oliveira believes that BNDES’ trajectory toward independence will continue under any administration, he discussed with S&P Global Market Intelligence in an interview at the company’s Rio de Janeiro headquarters Brazil’s economic, political and financial future ahead of the highly uncertain election.
What follows is an edited transcript of that conversation.
 Dyogo de Oliveira, CEO of BNDES |
S&P Global Market Intelligence: How would you sum up the political environment in Brazil right now?
Dyogo de Oliveira: Polls suggest a polarization in Brazilian society, where the two leading candidates have pretty different views of the country and different proposals on what to do with economic policy. This is generating some volatility in the markets and we have seen this environment reflect in the long-term interest rate and the exchange rate.
How might the winner in the election impact what Brazil’s economy will look like in 2019?
[T]he next president’s room for maneuver will be quite limited because the fiscal reality of Brazil is creating very strong pressure. … A number of issues will have to be addressed… The pension issue will have to be addressed given its growing role in the federal budget. This cannot be avoided. Whoever the president is, he will have to unveil a plan to balance the country’s fiscal accounts in a reasonable time frame. If the next government does not find a road map to prove it has the conditions … I believe we will be at risk of jeopardizing future growth.
Some candidates want to use unconventional income sources to balance fiscal accounts. Can balanced accounts be achieved without reforming the pension system?
Not in the long run. You can have in the short term — the first year — exceptional revenues and extraordinary expense cuts that generate an equilibrium. It is possible, but sustaining it depends heavily on a very strong and very important change in the pension regime.
Credit rating agencies and markets in general are beginning to become anxious about the reforms in Brazil. How would you describe the market’s current relationship with the country?
The fiscal problem in Brazil is a problem of local currency funding, so there is no pressure to sort it out immediately. The advantage we have today … is that the new government can take some time to adjust, but the response time [in introducing] the plan has to be very quick. Implementation can take longer. I don’t see such a pressure from the market for short-term debt reduction or shock in the accounts, but the government must have a plan that is recognized by the market as viable.
Candidates have expressed divergent views of the economy that directly affect BNDES. Workers Party candidate Fernando Haddad has a proposal that would shift 10% of foreign reserves as well as state-run banks contributions toward infrastructure funding. What might that mean for the size of BNDES disbursements?
Historically, BNDES has disbursed 2% of GDP. What we believe is that in a two- or three-year period, it will probably return to this level, at which point no [government] funding is needed for the BNDES, since it would have its own capacity to meet that disbursement level. BNDES does not have a funding problem today. There is no need for resources and I don’t believe that will be the problem in the coming years. We have to generate confidence among investors for them to take on and develop infrastructure projects. With well-structured projects and well-structured-legal and regulatory frameworks … there will be no shortage of funding.
How would you qualify institutional mechanisms to respond to situations where a future authority may decide to increase the size of the bank, as has happened in the past and as some of the candidates suggest?
The bank has a well-reinforced set of controls compared to what we had some years ago. It can do a better job of selecting projects, have better control of them and apply resources focusing on sectors and companies with better growth potential. BNDES is better prepared to face exceptional growth, but there are some issues that are not simply technical. If [growing to more than 2% of GDP] were at some point a decision by the government, BNDES could expand again.
Part of the policy expedited by BNDES is to divest some of its 85.64 billion reais ownership in several Brazilian enterprises as of June 2018, including a 35.54 billion reais holding in Petrobras, a 19.88 billion reais stake in mining company Vale and a 5.71 billion reais stake in meat processor JBS. So far, the bank has sold over 6 billion reais in shares, which has weighed significantly on the income statement for the first six months of the year, which show earnings of 4.76 billion reais, a 254% jump year over year.
How would you define the bank’s strategy regarding its billion reais stake in equity?
Our focus is to exit positions in our portfolio of mature enterprises and focus on investments to small and medium-sized companies with potential for growth and for exchange listings at some point. We are going to continue selling. [We expect] 10 billion reais of sales for this year.
[Editor’s note: Subsequent to this interview, BNDES raised its stake divestment target for 2018 to 12 billion reais from 10 billion reais.]
With regards to the bank’s stake in JBS, the federal police is investigating irregularities and filed charges against former executives from the bank. And BNDES itself recent said that it set up an internal committee to look into the case and hired an independent audit team. What is your view on that and what are BNDES’ plans for its ownership in the company?
Thus far, there has not been a formal indictment against the bank or its officials. What we have are accusations. The bank maintains its position in JBS because, in our evaluation, the price is very low. We could consider a sale but not at the current market price. There would have to be a negotiation in which a premium is considered.
Brazil is currently in the middle of a relatively low interest rate environment, with the Selic benchmark at 6.50% currently. Is that here to stay? And how does that impact banks?
This environment is definitive. Brazil has reached a very distinct level of strength of its economic fundamentals. Naturally, the monetary cycle is seasonal and there will be fluctuations, but we will not see short-term rates of 30% or 40% as we have in the past. From now on, we will have rates close to what he have now.
This changes everything. It modifies the positions of banks, investors and institutional investors. It represents a very profound change in the coming years, where funds applied today on the very short term will seek longer term applications with higher returns. BNDES has a very important role to play in stimulating the capital markets by supporting private debt issuance [and] investment funds in infrastructure. In a few years, the landscape for the Brazilian capital markets will be very different. It is already happening. In 2018, approvals from BNDES to infrastructure amounted to almost 11 billion reais, while the market issued 10 billion reais in ventures. This is healthy and will grow.
In the past, one of the criticisms targeted at BNDES was that it assisted large companies with high market access availability. What’s the view of management in that regard?
This year, we had nearly half of the disbursements go to SMEs and 40% to infrastructure. The focus of BNDES is on this [business] group… The bank’s role is not to fund companies that can borrow from the market. At this moment, BNDES has a totally different focus.
Does current management have a more favorable view of any of proposals discussed during campaign compared to other plans?
It is for the people to decide. BNDES will have to follow whatever the government’s decision is. In this government, we have implemented changes and shifted the focus toward smaller companies with growth potential and toward infrastructure projects that improve economic productivity. The path of our government is marked and very clear. The next government will make its own decisions.
