By Guilherme Grandi
The announcement made this Monday (23) by President Luiz Inácio Lula da Silva (PT) that Brazilian state banks, such as the National Bank for Economic and Social Development (BNDES) and Banco do Brasil, will once again finance works and services in other countries it took the financial market by surprise – and not for good reasons.
If the distrust of investors regarding political appointments to preside over state-owned companies was not enough, such as former PT minister Aloízio Mercadante at BNDES itself and senator Jean Paul Prates (PT) at Petrobras, Lula’s announcement brought up the memory of defaults and past scandals.
In the 14 years that the PT was in power, between 2003 and 2016, the BNDES financed loans in the order of US$11.8 billion for Brazilian companies to carry out infrastructure works in other countries, mainly contractors who were later involved in the investigations of Operation Lava Jato, such as Odebrecht, OAS, Andrade Gutierrez, Queiroz Galvão, among others.
The companies won bids for works in Latin American countries such as Argentina, Venezuela, Cuba and Costa Rica, among others, in addition to African nations such as Angola and Mozambique.
And, to comply with the winning proposals, they resorted to BNDES resources with subsidized interest, more accessible than in other private banks.
Official report with data up to November 30, 2022 (see here) shows that, of the US$11.8 billion granted in financing between 2003 and 2016, the BNDES has received back US$9.6 billion so far.
There is still another US$2.1 billion to be received, of which US$1.3 billion corresponds to loans made to Venezuela that have stopped being repaid.
In addition to the Venezuelan government, Cuba also has a debt of US$40.8 million with the BNDES, of the more than US$696 million loaned for various works, mainly in the expansion of the port of Mariel, about 40 kilometers away from Havana.
Although the amounts owed do not compromise BNDES cash and are within the default margin common to all banks, economists and financial market specialists see the return of financing for works and services in other developing nations with many reservations and caution at this time.
Luciano Bravo, specialist in business structuring with a focus on international capital injection and CEO of Intelligence Comercial, sees that the reality in this decade is very different from that experienced years ago, with economies deteriorating and the world heading towards a recession.
“We are at a time when we need to focus on the domestic market, especially on medium and small companies. And putting money in other countries, especially in those that are in notorious financial difficulty, is a risk that should not be taken”, he explains.
According to the specialist, a fund does not lend to an agent that is in difficulty or that runs the risk of not paying, and the BNDES “will be placed at that risk not only in Argentina, but also in Chile and Peru, as the discussions on the creation of a common currency for negotiations between the Mercosur countries”, he points out.
He also explains that the money used by the bank comes from the National Treasury, which can end up compromised in possible defaults – depending on the amount, it can directly affect inflation and the basic interest rate (Selic).
Bravo’s perception is the same as that of many of the main Brazilian capital and financial market brokers, who did not welcome President Lula’s announcement.
Infinity Asset Management reported that the speeches of the president and the economic team “confuse investors, frighten them, as they refer to a past of prohibitive fiscal costs and make the economy remain in the background, given the difficulty in generating scenarios for the present moment”.
Nova Futura reported that there was “indigestion with news about the possible use of the BNDES to finance commercial operations with Argentina”.
Analyst Matheus Spiess, from Empiricus, was more emphatic in his morning bulletin, saying that Lula’s speeches “resurrected old ghosts, such as the more developmental role of the BNDES and other public banks, which were hated by the Heads of State [ present in Buenos Aires] – the idea of us going back to financing pharaonic projects abroad sends chills”.
A tone similar to Luciano Bravo’s view, that Lula’s trip to Argentina was not just for the reopening of trade relations that were strained, as he himself reported in his first speech alongside President Alberto Fernández.
It was also to position Brazil as a “leader” of developing nations, to make the economies grow together.
However, Bravo sees an error in this strategy that the financial market is already aware of. By opening a conversation of help for the resumption of economic development in Argentina, which is experiencing galloping inflation
94.8% last year and a 40% devaluation of the Argentine peso, Lula sets a precedent for other nations in the same or worse situation to seek help.
And, by positioning yourself as a leader of these nations, it becomes more difficult to say no to some requests.
“Brazil today is the only large country that has its doors open to these countries that are in difficulty. But Brazil cannot ‘become their Messiah’, we don’t even have the conditions for that”, he adds.
Bravo’s opinion is reflected in the analysis by Diogo Catão, master in management and international economics and CEO of Dome Ventures, that Brazil knows it needs to advance in international trade.
However, this advance cannot be beneficial only for these nations with serious economic problems.
“Brazil cannot isolate itself externally, and this approach and bridge building policy is good and healthy. But the big fear is that these bridges will only benefit those countries in a more critical situation in South America, mainly. It will be necessary to analyze the requests made and, if possible, with the Chancellor [Mauro Vieira, Minister of Foreign Affairs] and Alckmin [Geraldo Alckmin, Vice President and Minister of Development, Industry, Trade and Services”, he analyzes.
There is also a fear that the BNDES will be used again for other questionable political-economic measures that did not work in the past, according to Paulo Uebel, former special secretary for reducing bureaucracy, management and digital government at the Ministry of Economy and columnist for Gazeta do Povo.
According to him, there is a fear that an attempt will be made, once again, to “encourage national champions, compete unfairly with the capital market and finance the export of services to dictatorships with a low level of transparency and governance”.
REGIONAL LEADERSHIP TO PROTECT NATIONAL INDUSTRY
Although President Lula’s announcement had negative repercussions on the financial market, there is one more factor that is weighing on the resumption of BNDES investments in Brazilian companies that operate in other nations: the advance of China in the economies of Latin America.
Igor de Lucena, economist and doctor in international relations from the University of Lisbon, sees that the president’s decision leaned much more towards the geopolitical question than necessarily to help in the development of nearby nations.
He explains that China is seeking to expand and diversify business around the world, with bilateral relations that can directly impact Brazilian exports to other Latin American countries.
Thus, by bringing Brazil closer to these nations, Lula forms a large bloc that can impose better conditions without losing market share.
The president himself has already seen this happen in the past, when he was against the creation of the Free Trade Area of the Americas (FTAA).
In the end, the Latin countries signed bilateral agreements with the United States, weakening Mercosur – which Lula is trying to strengthen in this new attack.
“One thing is Mercosur all united negotiating with China, where each of the members will put on the table the points that are more sensitive to them than to the others, and that gives Brazil an advantage. It would be bad for China to negotiate individually with the countries in the region, ignoring Brazilian interests, because from the moment it makes increasingly advantageous proposals and the countries accept them, there is a real risk that Mercosur will no longer exist”, he analyzes.
For him, this movement has already started, and Brazil needs to hurry if it wants to be relevant and have a market for the goods produced here.
Igor de Lucena sees that China is advancing more and more quickly and that the first block agreements can be signed as early as 2024.
BNDES NEEDS TO DIVERSIFY INVESTMENTS ABROAD
Just like a regular bank, the BNDES also works with different portfolios and financial investments, which include investing in assets such as Brazilian companies that operate in other countries. And this is acceptable, according to Diogo Catão.
The big question that needs to be changed in this new phase is where the bank will concentrate the loans.
In the 14 years in power, PT governments concentrated 89% of financing in just six countries out of the 13 in which Brazilian companies won bids: Angola, Argentina, Venezuela, Dominican Republic, Ecuador and Cuba.
Although Argentina has been paying what it owes contractors, there is concern that new contracts will not be honored due to the country’s economic situation.
“If we follow an investment portfolio management policy like a stock exchange, we should distribute these resources in more countries so that any defaults can be met with the interest generated by others. We are in a moment where it is not possible to distribute like this in just a few nations”, he explains.
There is also a need to analyze more carefully which countries can receive loans.
BNDES reports point out that some orders arrived at the bank already approved by Lula and former president Dilma Rousseff for countries like Cuba and Venezuela.
ROBUST GUARANTEES TO AVOID DEFAULT
Luciano Bravo adds remembering that in addition to analyzing which countries can actually receive investments without compromising the BNDES cash, it is also necessary to have a broad and complex system of guarantees against default.
Shortly after the announcement made by President Lula, Minister Fernando Haddad acted like a fireman to put out the fire and explain to the market.
In a conversation with journalists at the end of the afternoon, the Minister of Finance stated that, in the case of the first Brazilian financing, the Vaca Muerta gas pipeline, the gas produced in central Argentina and brought to Brazil will be “the guarantee of the investment itself”.
According to the Bloomberg agency, sources familiar with the negotiation claim that the financing would be covered by guarantees from both governments, and that Argentina would have to provide liquid assets, such as commodity contracts, to obtain the loans.
“The BNDES will try to protect itself by taking Argentine receivables. The problem is that these are already very committed to a series of other borrowings. And, in the event of an insolvency in Argentina, they will be executed as in the past, in which the country has already been the target of so-called ‘vulture funds’ of immediate execution, generating disputes between creditors”, emphasizes Bravo.
To minimize this risk, Lucena explains that it will be necessary to build a complete and robust framework of guarantees for granting loans and financing to other nations on the continent without running the risk of a default.
“We cannot take public money from our Treasury and put it in these countries. It is different from investing in nations like Chile and Uruguay, which have more organized accounts. Argentina has been in a very bad situation for a long time”, he adds.
With information from Gazeta do Povo