Latin Finance - November/December 2012 - 72

Parting Shot

Brave new world
Brazil is finally poised for a ‘massive wave’ of project financing, argues Luciano Coutinho, president of the country’s development bank, BNDES

B

razil is currently investing around 100 billion reais per year in oil and gas as well as infrastructure. However, we need to invest another $40 billion to $50 billion per year. We aim to add a minimum of 2% of GDP in infrastructure investment, to boost the aggregate investment to GDP ratio from its current 19% to 21% or more. There is a challenge in financing the extra amount of investment we need. We intend to attract the private financial system to help share the burden with BNDES. We believe that this is relatively viable given two important conditions. One is that interest rates are – and have already been – reduced substantially. Rates for Brazilian institutional investors, pension funds and insurance companies are now below their target, so they need to diversify their sources of fixed income. There’s no better alternative than sound infrastructure projects with high rates of return for new fixed-income securities. We have the chance to ‘crowd in’ the market to new private assets. Law 12,431 has created a number of tax incentives for longer duration fixed income for financing infrastructure projects. This year, we improved this law. Now we’re all ready to start launching a massive wave of fixed-income related to infrastructure projects. I’m confident that the share of the financing for infrastructure by market financial instruments will grow very fast in the coming three years so as to grab at least a quarter – 20%-30% – of the long-term financing market. In this way, BNDES’s absolute size will not shrink because the overall pie is growing. But almost all the additional demand must be met by the market. The first impulse will come from the capital markets. Second, banks will also be able to offer longer duration on the credit side as the Brazilian savings profile moves from very short duration to longer duration, which, with lower interest rates, is something that will happen naturally. Brazil had an excessively high plateau of short-term interest

“The suggestion that BNDES is ‘crowding out’ the private sector usually comes from economists who do not know how the market works”

rates. The removal of 500 basis points until today has slashed an excessive interest rate that will help improve the quality of the Brazilian fiscal fundamentals. Second, we have a very able and autonomous central bank with a mission to oversee inflation. We wish to attract not just Brazilian institutional investors but also foreign investors. Incentives are open to foreign investors in infrastructure provided that they are willing to take reais. BNDES was instrumental in persuading the Brazilian financial authorities to develop this market. We will be providing our support. We are cooperating closely with the market – in addition to enhancing liquidity in the secondary market, such as creating a deeper market for project bonds. The suggestion that BNDES is ‘crowding out’ the private sector usually comes from economists who do not know how the market works. In addition to offering concessions and PPPs, we are reforming the regulatory framework, by mobilising the private sector with concessions. We have a very well established framework for concessions in Brazil. The third important ‘crowding in’ action is in the origination of infrastructure projects. We will propose to the private banks that we can share the financing, initially at a minimum of 10 – 15%, or even more if the market has the appetite, either through longterm bonds or long term credit. We’re also engaged in structuring infrastructure funds, where we can be a minority partner, taking 10%-15% positions in funds. I’m confident that the process will move fast because the main hindrance for the participation of private sources in long-term finance was the very high level of short-term interest rates. You had nice yields with no risk and high liquidity. That was heaven for savers but it was an absolutely abnormal situation that lasted two decades. Turning this page was the big novelty in Brazil – and today, we have a new scenario.

Luciano Coutinho is president of BNDES. He was interviewed by Taimur Ahmad

72 LatinFinance

November/December 2012
Latin Finance - November/December 2012

Table of Contents for the Digital Edition of Latin Finance - November/December 2012
