Lending less, doing more

Francisco Gros presides over a bigger budget than just about about any other financial institution in Latin America. As president of Brazil’s national development bank, Banco Nacional de Desenvolvimento Econômico e Social, he manages an annual budget equivalent to about $10 billion. Since its foundation nearly 50 years ago, BNDES has acted as the only source of long-term local currency financing in Brazil.

It has played a central role in Brazil’s industrial development and in the evolution of its capital markets, although its critics say the bank suffers from excessive bureaucracy that prevents rapid decision-making. BNDES is now entering a new phase of support for the capital markets as is own ability to finance projects reaches its limits.

“We are only able to support a limited number of projects and companies,” says Gros. “We need them to go to the markets. I tell them that I can only support 30% of a project and they will have to go elsewhere for the [balance].”

Few can match Gros’ range of experience, which has included stints on Wall Street, the private sector and Brasília. Gros has served as Brazilian central bank president, CEO of Aracruz, the pulp exporter, and until 1999 was head of Morgan Stanley’s operations in Brazil.

As the head of BNDES, he is now focusing on developing the local corporate debt and equity markets with initiatives such as offering companies better terms for loans if they comply with higher standards of corporate governance and disclosure. BNDESPar, bank’s investment division, has pioneered new instruments, such as offering three-year puts on corporate debt placed with private-sector investors to increase maturities.

However, Gros says opposition to the new corporate governance law in Congress is hindering progress. “This is the old Brazil trying to stop the new Brazil from being born,” he says. “We are still very, very far away from what is needed to build a local capital market, but everything will work out.”

A more positive development was the São Paulo Stock Exchange’s creation in May of the Novo Mercado, a parallel listing for companies that meet higher standards of corporate governance and disclosure and that also offer enhanced rights to minority shareholders. Gros says, “At the moment the benefits are theoretical. We will have to wait for them to develop and I hope that investors will vote with their checkbooks.”

Demand for BNDES loans from most sectors has slumped as the economy has slowed down, but the power industry has taken up the slack. Brazil had to implement emergency power rationing in June when water levels in hydroelectric dams, which supply nearly all the country’s power, fell to record lows. For the time being, BNDES is financing up to 80% of new power projects worth about $4 billion and reduced its approval process for loans by eight months. Gros says “We can assure investors that there is money available for power projects.”