Author: David Friedlander and Ricardo Leopoldo

Source: The State of S. Paulo - SP - 25/10/2009

The president of the National Bank for Economic and Social Development (BNDES), Luciano Coutinho, thinks that the government will need to insure the cost of funding the public sector so that the country continues to grow in the coming years. Coutinho points out that the opinion, which touches on one of the main criticisms of the Lula government, is strictly personal. But he understands that the idea should be discussed as part of a new agenda for the country. In this new agenda, he also suggests the reform of Social Security and, on the business side, greater participation by private banks in the financing of large projects.

Head of a cashier with more than R $ 100 billion to invest, Coutinho understands that the initiatives are necessary to increase the investment rate in the economy. For the coming years to be prosperous, he says, it will be necessary to invest the equivalent of 25% of the Gross Domestic Product (GDP) per year. The rate today is at 18%. Only then will the country be able to grow, in a sustainable manner, at a rate of 6% per year.

Below are the main excerpts from the interview.

Mr. says that in order to grow, the country needs to increase the investment rate, which today is equivalent to 18% of GDP. How to do this without putting pressure on inflation?

Before the crisis, investment reached 20% of GDP, which is still insufficient. We need to raise this rate and the savings rate in the country to something close to 24%, 25% of GDP. This would give us comfort to grow sustainably at 6% per year, without inflation. I believe that the investment expansion agenda should be a top priority for the country.

What's on that agenda?

Looking to the future, this means expanding domestic savings and requires reforms: containing the growth rate of government spending, long-term reforms to the social security system and a strong incentive for household savings and the development of institutional savers. This is aimed at strengthening investment capacity.

The agenda that mr. proposes comes in the opposite direction of what happens today, especially in relation to the management of public spending…

This is a medium and long term agenda. Some decisions that changed spending this year were adopted earlier. We are living a normal period in any democracy, which is a pre-election period. It needs to be understood within a new moment.

Is this an agenda for the Lula government or for the next government?

I am giving my opinion as a simple economist and citizen, who happens to be president of BNDES at the moment. The decision on the government's agenda, on economic policy, is outside my sphere. It's my opinion. This long-term theme is appropriate whenever there is a majority election. It is a timely topic to discuss in the long run.

What is the role of the private sector in this process?

On the private side, I see that Brazil has a set of extremely profitable, low-risk investment opportunities in at least five relevant frontiers: the entire oil and gas chain, the electricity infrastructure sector, the entire logistics, transport and ports, civil construction and agribusiness. In addition to them, I believe that Brazil should develop investments in its manufacturing industry. This requires a slightly more active development policy than in the other five frontiers.

There is a need to expand domestic savings, because otherwise it will not be possible to reconcile Brazil's growth with the financing of aggregate investment without incurring growing current account deficits and thus making the country dependent on foreign savings.

Would that be a problem?

Nothing against foreign savings, which should be attracted, especially in direct investments. But over-relying on it makes growth vulnerable.

Until when will the BNDES be the only source of long-term financing in the country?

Long-term financing will require the contribution of the private banking system so that it is not strictly under the responsibility of the BNDES. This task, in the end, can become impossible. Therefore, it is important to discuss this positive agenda with the private banking system. Banks can and should participate more in investment financing. However, this will require an improvement in institutional conditions and incentives for savings, especially medium and long-term private savings.

What needs to change?

Facilitate the establishment of medium and long-term funding (source of funds) from the banking system itself, enabling it to take risks of long maturities, of larger scale projects that today have been almost exclusively under the responsibility of the BNDES financing. Of course, the capital market helps, but these projects are generally leveraged, as there is typically savings of 30% in equity (shares) and 70% in financing. The equity side of the investment will be well balanced by the booming development of the capital market. But long-term financing needs the banking system.

When mr. do you think private banks will move in that direction?

I am confident that the reduction in defaults - that of individuals has already fallen and that of companies is starting to fall - and the more aggressive movement of some banks, will unleash competition between them and cause expansion of the credit supply in the coming months .

How will BNDES finance itself next year?

There is a decision by the President of the Republic and the Minister of Finance to ensure the necessary resources for BNDES. We are in negotiations and I am sure on this point, but I cannot say.

Like mr. does it assess the association between the BNDES 'performance and the strong government policy of the Lula government?

I think there is a false assessment. There is no going back to the past, to the old state developmental model. The liberalizing model was also inconsistent in the way it was implemented in Brazil. We must unite the two: we must have an efficient State, combined with the virtues of the market.

This combination requires, in Brazil, the creation of a new paradigm of relationship between the State and the business system. I feel very comfortable. There is no willingness on our part to replace the market or the private system. On the contrary, our interest is to strengthen it.

The bet is growing in the market that you can replace the BC president, Henrique Meirelles, if he leaves the government to run for public office ...

This is unfounded. My expectation is to remain at the BNDES as long as I continue to deserve the confidence of President Lula.