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Cablegate: Brazil: Nec Hubbard and Bndes Luciano Galvao Coutinho

VZCZCXRO3255
RR RUEHRG
DE RUEHBR #2064/01 3031921
ZNR UUUUU ZZH
R 301921Z OCT 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0286
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 5313
RUEHSO/AMCONSUL SAO PAULO 1051
RUEHRG/AMCONSUL RECIFE 7266

UNCLAS SECTION 01 OF 02 BRASILIA 002064

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958:N/A
TAGS: ECON ETRD BR
SUBJECT: BRAZIL: NEC Hubbard and BNDES Luciano Galvao Coutinho
October 11, 2007


BANCO NACIONAL DE DESENVOLVIMENTO ECONOMICO E SOCIO (BNDES):
1. (U) When NEC Director Hubbard, DPA/DNSA Dan Price and Ambassador
Sobel met with BNDES President Luciano Galvao Coutinho on October 11
in Brasila, Galvao began by providing brief historical background
about BNDES. BNDES was established in 1952 to promote the expansion
of capital-intensive industries believed to be of strategic
importance to Brazil's national economic development - e.g., mining,
heavy industry, and petroleum. Due to Brazil's historically high
rate of inflation, the development of market-based lending was
extremely limited (e.g., average tenors for most market-based
lending were typically 2-3 months). In contrast, BNDES's loan
portfolio extended out many years and provided a stable capital
source for key industries. Over time, BNDES's mandate evolved and
its lending has become more focused on poverty reduction and social
development objectives. Galvao stated that BNDES has assumed much
more of a commercial orientation in recent years and now has several
units - for example, in the areas of project finance and investment
banking - whose chief mandate is to maximize profits. Total reported
BNDES assets are currently 200 billion BRL, its weighted
capitalization ratio is 12.5%, and H1-07 profits were 4 billion BRL.
The government of Brazil emains BNDES' sole owner.
2. (U) Galvao noted for sources of BNDES financing: (1) periodic
capitl injections via the Ministry of Finance (much more important
in past years than at present), (2) a ederal government
unemployment fund from which BDES is allowed to borrow at
non-market rates, (3) an internal investment banking unit that
generates profits which are partially retained and which help
cross-subsidize other units, (4) revenues from its non-investment
bank units which are an additional source of earning retentions.
Interest rates that BNDES charges are set by Brazil's National
Monetary Council (consisting of Central Bank, Finance Ministry, and
Planning Ministry).
INFRASTRUCTURE:
3. (U) Galvao spoke broadly about business areas BNDES now hopes to
develop. He noted interest in developing cross-country
infrastructure projects that will promote economic integration among
South American countries. He recognized this issue as a priority
for Lula and said BNDES has been working with IDB and has begun a
conversation with the World Bank on infrastructure partnerships. He
noted that President Lula, in his meeting that day with all Brazil's
Latin American Ambassadors, planned to focus on regional
integration.
4. (U) However, Galvao cautioned that BNDES functions under the
constraint that, as a public bank, BNDES was not permitted to
finance projects that do not involve Brazilian companies or use
Brazilian good. He stressed this was an important qualification
that underlines the need for IDB and World Bank participation in
such projects as well. He added that at President Lula's direction,
BNDES is creating a special fund for project development. BNDES is
also focused on project development and lending inside Brazil.
Galvao underlined that Brazil needs coordinate with IDB and IFC to
identify good sound projects "of which we have a lack." "We need a
number of sound macro-infrastructure projects that integrate
countries. We think exposure to trade leads to stability in the
region, for example if a land-blocked country can get a route to a
port." Galvao felt BNDES could help either by offering
concessionary loans or by identifying useful projects. He indicated
that, again at Lula's direction, BNDES had created a special team to
work on this issue.
5. (U) Galvao summarized the challenges were a) good projects and b)
liquidity/risk. He noted that there is never a problem loaning to
low-risk countries' projects, but when a country is high-risk, there
needs to be developed a kind of risk insurance that is not too
expensive for these countries.
6. (U) Galvao noted BNDES was "instrumental" in Brazil's recent road
concession and that it developed "the entire model underlying this
transaction." He also noted the BNDES is contributing to development
of a project to use sugarcane for electricity which the bank would
finance on special terms. He added that eighty ethanol projects are
funded by the bank, all with the possibility to produce electricity
in the future, an area BNDES is interested in supporting given the
potential electricity crisis in the future the country faces.
INVESTMENT CLIMATE:
7. (SBU) DPA Price queried Galvao on the investment climate in
Brazil, noting there is a perception of legal and regulatory risk.
He highlighted the potential benefits of arbitration. Galvao
acknowledged he was highly aware of these difficulties, but believed
institutional progress is being made. Galvao stated that political
risk in Brazil is likely to remain low for the next twenty years,
and noted that "the PT is the party farthest to the left that Brazil
is likely to elect for the foreseeable future." However, he stated
that regulatory risk remains high - in particular, he noted that
environmental regulations among some state governments remain a key
barrier to new project finance lending. Galvao noted that many
regulatory agencies were created after privatization (which he said
had been done in a very "improvised way.") and needed to improve
technical capability. He noted civil aviation regulatory structures
in particular had not been able to cope well with increased growth
and demand.

BRASILIA 00002064 002 OF 002


8. (U) This message was jointly produced by Treasury Sao Paolo and
Econ Brasilia.
9. (U) Delegation cleared this message.

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