Under criticism for resuming old practices, Brazil’s government proposes to modernize sector but lack of clarity worries

23/01/2024

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President Lula, Vice President Geraldo Alckmin, and Ministers Esther Dweck and Rui Costa — Foto: Brenno Carvalho/Agência O Globo

The government’s new industrial policy, announced on Monday (22), envisages approximately R$300 billion in contributions by 2026 through financing, subsidies, and equity participation in projects. President Lula and Vice President Geraldo Alckmin stated that the amount was sufficient to modernize the industrial sector. Businesspeople present during the announcement viewed it as “a good start.”

The measures have received both criticism and praise. Economists have lauded them as a promising initial step in stimulating various sectors of the national economy. However, critics have also argued that these measures involve a repetition of old formulas that were ineffective during previous Worker’s Party administrations. Such criticisms include prioritizing national content in public purchases, potentially isolating the country from global production chains, and lacking clear targets.

Aloizio Mercadante, the president of Brazil’s Development Bank (BNDES), has denied that the government is reverting to the policy of national champions, which was prominent during the previous Lula administrations. He stated, “We’re not going to choose partners.”

The financial market responded cautiously to the announcement, with the real losing ground against the dollar and the stock market closing lower.

There is also uncertainty surrounding whether public funds will be used to subsidize a portion of the new policy, potentially raising concerns about fiscal rules. Mr. Mercadante indicated that BNDES’s portion would be financed from its own funding but did not provide explicit details. Of the planned R$300 billion, R$271 billion is allocated for financing, R$21 billion for non-reimbursable credits, and R$8 billion for direct company contributions, primarily for purchasing shares.

The plan, “Mais Produção” (More Production), is structured around four main pillars: Innovation, Exports, Productivity, and Decarbonization. The majority of the funds, approximately R$250 billion, will be provided by BNDES, while the remainder will be overseen by the Financier of Studies and Projects (FINEP) and the Brazilian Research and Innovation Company (EMBRAPII).

The largest allocation of funds, amounting to R$182 billion, is directed towards policies to increase industrial productivity. This package includes credit lines offered by BNDES, with interest rates starting at 5.5% annually. It also encompasses initiatives such as a broadband expansion program, and another focused on digitizing 90,000 small and medium-sized industrial companies.

The Innovation pillar will receive R$66 billion in funding, with interest rates tied to the TR (Reference Rate). According to Vice President Alckmin, this financing instrument effectively addresses the issue of funding innovation in the industrial sector. He remarked, “I would say that the funding issue for research and innovation is well balanced because it is tied to the TR, which is no more than 5% a year.”

Vice President Alckmin, who also oversees the Ministry of Development, Industry, and Foreign Trade, emphasized that the innovation axis includes a portion of FINEP’s non-reimbursable resources, meaning they don’t need to be repaid.

The government’s policy of subsidizing the productive sector, particularly through BNDES, faced scrutiny from the Federal Accounting Court (TCU) during previous Worker’s Party administrations. Nevertheless, the government continues to defend this measure, considering it essential for maintaining the industrial sector’s competitiveness, and cites similar international experiences.

Support for exports is allocated R$40 billion. The pre- and post-shipment lines provided by BNDES will be remunerated based on the TLP (Long-Term Rate), the Selic, and rates linked to the U.S. Treasury.

Mr. Mercadante also used the opportunity to request that Congress authorize the institution to resume financing services abroad, an operation that was halted after the Car Wash scandal. He stated, “We’ve lost national engineering, and if we don’t export services, we won’t be competitive globally.”

In conclusion, the decarbonization pillar will receive R$12 billion in funding from the Climate Fund, which the BNDES manages. Industrial projects falling under this category will have access to financing lines with interest rates starting at 6.15% per year. Additionally, a fund is planned for investment in critical minerals, such as lithium, used in the production of electric vehicle batteries. The BNDES is expected to have a stake in these strategic projects for the country.

Beyond loans and contributions, the government has also allocated R$3.4 billion in tax incentives to rejuvenate the industrial sector. Mr. Alckmin highlighted accelerated depreciation as one of the “most effective” measures of the new industrial policy. Under these rules, companies replacing their equipment after two years of use will benefit from reduced Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL).

President Lula praised the announced measures and emphasized the importance of their implementation. He expressed dissatisfaction with the lack of clear targets and stressed that the objective over the next three years should be to achieve concrete results. He also mentioned that the R$300 billion allocation would address the financing challenges of industrial modernization, and he urged Brazilian entrepreneurs to have more faith in the country’s potential.

Leonardo de Castro, the vice-president of the National Confederation of Industry (CNI), considered the R$300 billion as “a good start” and cited larger figures made available by developed countries. He criticized what he perceived as ideological influences on Brazil’s development model, emphasizing the need for honesty and a more pragmatic approach to the country’s development in the global context.

*Por Murillo Camarotto, Renan Truffi, Fabio Murakawa — Brasília

Source: Valor International

https://valorinternational.globo.com/