Cecilia Machado: The role of the BNDES in the development of the capital market

In September 2017, Law 13,483 instituted the TLP (Long-Term Rate), which substantially changed the cost of BNDES funding. The TLP, defined by the consumer price index (IPCA) plus the real interest rate on Treasury bonds (NTN-B), began to remunerate the main sources of funds for BNDES loans, such as the PIS- Pasep (now extinct), the FAT (Worker Support Fund), the FMM (Merchant Marine Fund) and the financing granted to the bank by the National Treasury. As a result, the interest rate in contracts with the BNDES incorporated the TLP as a component related to the financial cost of loans.

Before the TLP, the Treasury sold securities on the market to pass on to the BNDES, which, in turn, lent at lower rates. The difference between rates on Treasury bills and rates on BNDES loans represented a subsidy: an implicit channeling of government resources to finance the bank’s projects.

The same occurred with the other sources of funds directed to BNDES loans, such as the FAT and the FMM, remunerated by the old TJLP, a rate historically established below the other reference rates in the economy, such as the Selic. After the TLP, the BNDES’ funding costs increased, more reliably reflecting the financing of the bank’s operations.

Among the numerous arguments in favor of the TLP, two are particularly relevant, as they generate benefits for the population that go beyond those directly related to the projects financed by the BNDES. First, the TLP represented the end of the implicit subsidies granted on the bank’s financing, since the rate made the bank’s cost of funding equivalent to the cost of funding its sole shareholder, the federal government. Its creation made it clear that subsidies compete for Budget resources with other government programs and actions.

Second, the end of the BNDES’ rate subsidies increased the economy’s stock of credit, which is sensitive to monetary policy, amplifying its potency. This means that increases or decreases in the Selic rate are quickly transmitted to the credit market, which leads to a neutral interest rate that is also structurally lower, with positive impacts on investments, economic activity and employment.

But what few anticipated is that, together with the gains in transparency in public spending and in the power of monetary policy, the TLP brought with it a true revolution for the Brazilian capital market, which became competitive and opened up space for companies to finance themselves through issuing shares on the Stock Exchange or issuing credit rights, such as bonds, securitizations, structured and syndicated operations.

Data from Anbima show that, concomitantly with the reduction in BNDES disbursements to legal entities between 2014 and 2018, which went from 2.9% to 0.7% of GDP (and which has remained at this level until the present date), funding in the capital market (variable income and fixed income) more than doubled between 2014 and 2021, reaching 6.3% of GDP last year, as can be seen in the graph.

Created in 1952 to encourage long-term financing and investment in the various segments of the Brazilian economy, the BNDES supported several projects under the belief that the government’s sectoral direction and granting subsidies for the bank’s loans were necessary to support companies in its investment plans, thus contributing to the country’s growth.

But the last five years of TLP have shown that this is a mistaken view and that it is possible to build a business environment that fosters economic development through funding in the capital market. This funding prioritizes companies with the best management practices, which are capable of innovating and growing in response to society’s demand for their products and services.

The process of creative destruction —in which inefficient companies close their doors and innovative companies expand the coverage of their businesses— is an important pillar for the country’s economic development. It is not compatible with directing resources to specific and inefficient sectors, which depend on subsidies to survive, something that TLP, fortunately, left behind.