UPDATE 1-Brazil's BNDES crowding out private banks from loans -OECD
BRASILIA, Oct 22 (Reuters) - Brazil's state-run BNDES, the largest development lender in the Americas, is crowding out private-sector banks from corporate credit markets, and the government should phase out financial support for the bank, the Organization for Economic Co-operation and Development said on Tuesday.
In a survey of Brazil's economy, the OECD also recommended the government instruct BNDES to finance badly needed infrastructure projects, small and medium enterprises and innovation.
Rio de Janeiro-based BNDES is the main source of long-term domestic financing of large Brazilian companies that have used some of the money to expand abroad. The bank's outstanding loans are equal to 6 percent of Brazil's gross domestic product, the OECD said.
Although credit is expanding in Brazil, the financing of capital spending at longer maturities remains scarce outside the BNDES, whose loans outstanding are twice as large as that of the World Bank. The government should also start requiring private co-financing of BNDES loans to spur the development of domestic capital markets, the survey found.
"Further development of long-term credit markets is hampered by a lack of private participation, owing to a uneven playing field caused by strong financial support to the national development bank which dominates long-term lending," the OECD said.
The OECD recommendations follow criticism of President Dilma Rousseff's government for using BNDES to speed up growth in the sluggish Brazilian economy.
The bank has been criticized for lending taxpayer money at below-market rates to fund the overseas expansion of local companies, such as JBS SA, the world's largest meatpacker.
OECD Secretary-General Angel Gurría said development banks stepped in to compensate for a "market failure" when private lending dried up in the 2008 world financial crisis, and the BNDES helped Brazil weather the turbulence better.
But with financial markets returning to normal, development banks like BNDES should give way to private banks and pension funds to take up the slack in long-term lending, Gurría said at the presentation of the survey in Brasilia.
The Paris-based OECD is a forum of 34 nations committed to democracy and the market economy. and its only Latin American members are Mexico and Chile. The OECD issues a survey every 18 months on its members and six key emerging countries Brazil, China, India, Indonesia, Russia and South Africa.
Brazil's National Treasury has funneled more than 300 billion reais ($138 billion) of taxpayer money into BNDES, a situation that some analysts have said stoked an increase in government debt. Finance Minister Guido Mantega said last week that annual capital injections into BNDES will be phased out within a few years.
Still, BNDES lending reached a record 156 billion reais last year, an 11 percent increase over 2011. BNDES loans account for more than a quarter of outstanding lending in Brazil and about 70 percent of corporate credit lines with maturities over three years.
BNDES lends at less than the central bank's benchmark Selic overnight interest rate, making it hard for private lenders to compete in a country where borrowing is costly. BNDES provides credit at less than half the market short-term rate, the OECD said.
"Given the dominant role of BNDES ... and its access to funding at preferential rates, the playing field will need to be leveled before private lenders will be able to compete," the study said.