Industry support measures spread fear about use of public funds

01/24/2024

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José Luis Gordon — Foto: Leo Pinheiro/Valor

Although the government’s new industrial policy launched on Monday (22) has raised concerns among economists about the use of public funds to back investments, most part of the amounts were already included in the Brazilian Development Bank’s (BNDES) budget for the coming years. “There will be no capital injection from the Treasury into BNDES [to support industrial policy],” José Luis Gordon, director of productive development, innovation and foreign trade at the development bank, told Valor.

Of the R$300 billion to be invested by 2026 in the new industrial policy, R$250 billion (83% of the total) are expected to come from BNDES. The amount includes loans at market rates, implicit subsidies for innovation at the cost of the Reference Rate (TR, which adjusts savings accounts), and investments in funds (equity).

In the case of BNDES, the cost of loans is linked to the Long-Term Rate (TLP), but loans may also be indexed to the dollar in the case of external funding or via the Climate Fund (green bonds). There will also be subsidies via TR for innovation. The development bank also expects to raise funds to lend in the future, including to industry, via Development Credit Bill (LCD), pending on Congress approval, and via Agricultural Credit Bills (LCA). As Valor learned, should the LCD be approved, it could generate additional funds for the bank to lend, but the 2024 figures are unlikely to change.

That is because the BNDES operates with long-term loans and projects take time to mature. The bank’s budget could require more funds in 2025 or 2026, including to lend to industrial companies, but that will depend on economic growth. At the end of December, financial director Alexandre Abreu estimated that in 2024 the bank could lend from R$130 billion to R$160 billion, compared with R$115 billion to R$120 billion last year. The official figure will be known once BNDES releases its fourth-quarter report, in March.

The goal of the current administration, under the helm of Aloizio Mercadante, is to return to growth, which is expected to occur gradually. The aim is to reach 2% of the Brazilian Gross Domestic Product (GDP) in 2026, with investments of some R$200 billion per year.

Sources say the BNDES does not have current funding to sustain such investments. The available funds are enough to ensure a 1.3% share in the GDP. However, should the LCD be approved, the bank could gain momentum to raise and lend more funds, although the market is not sure about the real potential of this security to raise money on a scale enough to back infrastructure projects for long terms, of five or 10 years.

Mr. Gordon, the BNDES productive development director, notes that the “Mais Produção” program announced by the government is intended to show the available resources to the productive sector for the coming years, similar to what occurs in agriculture. “It’s the industry’s Crop Plan,” Mr. Gordon said, in a reference to the program created to boost agriculture. The initiative has been divided into four axes: innovation, exports, productivity and decarbonization. In the exports area, the bank expects to return to back services and intends to create an agency dedicated to international sales, the BNDES Exim, a plan that has been going back and forth for nearly 20 years.

Of the R$300 billion announced, R$271 billion are expected to be granted in loan operations. Other R$21 billion are expected in non-refundable facilities and R$8 billion in capital injection. Mr. Gordon says that the amount will not be used to acquire more shares in companies, but to structure investment funds in which BNDES will act as an anchor, bringing the market along. The R$300 billion figure also considers that R$77.5 billion, or 26%, were approved in 2023, most of it by BNDES, but also by Finep. The idea is to get Banco do Nordeste (BNB) and Banco da Amazônia to join the program, Mr. Gordon said.

“The ‘Mais Produção’ program is important for the economy to grow and for us to have productivity gains,” Mr. Gordon pointed out. Studies show, however, that previous initiatives, in other Workers’ Party (PT) administrations, were not enough to increase the productivity even with the BNDES injecting billions of subsidized funds into specific sectors, dubbed as “national champions.” The moniker refers to the choice of certain sectors that received support from the state in a previous version of industrial policy. Mr. Gordon claims there were indeed productivity gains. “The country will not be able to fund the production of machinery and equipment without BNDES,” he said.

Some economists understand the high degree of subsidies from the BNDES in the past pushed the private sector away in granting credit to companies. The private sector only returned after the BNDES downsized and established the TLP as the reference rate in loans. Now, new concerns are raised with the new industrial policy that past mistakes could recur.

Mr. Gordon said, “We are in alignment with the government’s budget forecasts, the BNDES is in alignment with [Finance] Minister [Fernando] Haddad’s policy. The bank will not use Treasury funds.” Although the bank’s projections indicate a limited number of subsidies in new industrial policy loans, the market is concerned.

Armando Castelar, an associate researcher at the Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV), says the program announced by the government does not address the manufacturing industry’s biggest problem: low productivity, which leads to a constant loss of participation in GDP. Mr. Castelar notes that the program is focused on subsidizing sectors, and not on reversing the decline in productivity.

“Why does that raise concerns among so many people? Firstly, because it is a policy intended to compensate for low productivity, not to increase productivity. It’s a local content policy. As it is local content, taxpayers are paying for that. As it is a commercial barrier, consumers are paying for that. It doesn’t increase productivity, it keeps productivity low,” he argues.

In the economist’s opinion, the government’s initiative prevents the natural selection process and the most efficient sectors from developing. “It’s a support program for low-productivity companies. The result is that the country’s productivity remains low,” Mr. Castelar said. The second problem, in the economist’s opinion, “is it all has a price, it costs money.” He explains that, to extend subsidies to companies, the government takes money from taxpayers. “Brazil already has a very high tax burden and to provide such subsidies it will have to increase tax burden even further,” he notes.

Sergio Lazzarini, a professor at Western University, has a similar opinion. “What is worrying is that we made changes to give some discipline to BNDES loans. The TLP was implemented in recent years, and now we see changes underway to allow BNDES to change the reference rate for loans and capitalize directly,” he points out.

For the economist, it is inevitable to make connections between this Monday’s announcement (22) and the politics of “national champions,” especially given uncertainties accompanying the government’s announcement: “If it is to benefit companies and large groups with the argument that they need to export since they have national technology, we are again talking about national champions. And on a path of potential disaster as it was in the past.”

*Por Francisco Góes, Paula Martini, Rafael Rosas — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/