Brazil’s government submitted a bill to congress proposing to diversify the funding of local developments, including BNDES, but it raises certain concerns among market agents.
The proposal outlines the creation of development credit letters (LCD), a security to be issued by development banks to reinforce their funding structure.
“This proposal will likely reduce the cost of BNDES funding rates, but it is always important to remain vigilant so that, in the long term, BNDES does not adopt past policy stances with an indiscriminate increase in financing operations,” Roberto Troster, economist at consultancy Troster & Associates, told BNamericas.
“A good development bank is an institution that makes the country develop economically in the long term and doesn’t just increase loans,” he added.
The government is also proposing a new format to calculate the interest paid by development banks for their funding, using a basket of interest rates.
“With the proposal of this bill, President Lula [Luiz Inácio Lula da Silva] reaffirms the leading role of BNDES as a fundamental agent of Brazilian development,” BNDES president Aloizio Mercadante said in a statement.
“In addition to the possibility of increasing funding, we will be able to use different [long-term interest rate] TLP rates without creating any subsidy. With this, it will be possible, for example, to have a more attractive approach to fostering micro, small, and medium-sized enterprises, generating more employment and income,” added Mercadante.
According to BNDES, the new funding mechanism could add 10bn reais (US$2.1bn) per year in financing for development banks.
Since taking office in early 2023, President Lula has advocated for increasing public investment in the economy and stepping up the activity of development banks to finance infrastructure and other long-term projects.
MINAS GERAIS BANK
In addition to the new securities to be created by the government, development banks in Brazil are also looking at others ways of diversifying funding.
Minas Gerais state development bank BDMG announced its first operation with the Asian Infrastructure Investment Bank (AIIB) to raise US$30mn.
The funding will be used by the bank to finance renewable energy generation projects or businesses in the state that have connections with Asia, especially in infrastructure, the state government said in a release.
BDMG’s approved credit limit with the Asian Bank is US$100mn.
Read More: Brazil proposes new funding mechanism for local development banks