Brazilian state development bank BNDES is to see its government funding cut by at least half, according to statements made to the press by the country’s finance minister Guido Mantega.
It is likely that cutbacks will be brought in next year once the new government headed by president-elect Dilma Rousseff officially takes over. The plans are part of a wider government initiative to curb public expenditure and control rising interest rates.
In October, Brazil announced a budget deficit as government spending overtook growth in the economy. In the previous month, the country had a record budget surplus which was considerably improved by the record share offering by the Brazilian oil company Petrobras.
In recent years BNDES has set new records in terms of the funding it has pumped into Brazil, and played a fundamental role in propping up the economy at the height of the financial crisis.
By the end of October 2010, BNDES had released R146bn (US$85bn) in funding during the preceding 12 months, marking a 43% increase than recorded in the same period the year before.
Out of that total released by BNDES, R56.1bn went to industry, R54bn went to infrastructure, and a total of R26.2bn went into trade and services, while R9.5bn for agriculture and cattle.
At the end of November, Fitch affirmed the long-term foreign currency rating of the bank’s US$1bn unsecured notes set to mature in 2019 at BBB-. This rating is equal to the sovereign rating for Brazil.
In a note, Fitch observes that BNDES has been “an important instrument in the government’s strategy to combat the effects of the global financial crisis on the Brazilian economy”.
But it also notes that the sizeable lines of credit extended by the Brazilian treasury would have an impact on the gross government debt figure, “a continuation of such funding lines [is] uncertain, funding could limit the rate of future growth”.
This could result in BNDES seeking alternative sources of funding, seeking financing from the capital markets, international funding and the divestment of some of its portfolio of shares.
News that BNDES might have to curtail its lending will please some in private market, with some complaining that the development bank has become too big and is crowding out private sector banks, particularly in the provision of long-term financing, by offering cheaper rates and longer tenors.
But, the Brazilian government is also keen to see the private sector ramp up its activities to allow BNDES to reduce funding levels.
“The Brazilian government has identified BNDES as a considerable threat to its fiscal equilibrium given the amount of funds demanded by the development bank,” analysts at IHS Global Insight comment.
“Although the bank is currently contributing to a rapid economic expansion, it is leading to an unwelcome increase in the overall level of prices. Therefore, the government is looking to encourage private sector banks to replace BNDES as the major provider of long-term loans.”
The new head of the central bank, Alexandre Tombini, is also expected to apply an aggressive tightening monetary policy to further control inflation. This is likely to curb credit growth in 2011.