Rousseff's Professor Must Wean Brazil Off Cheap Credit
Luciano Coutinho oversaw a surge in lending as president of Brazil’s development bank that increased the country’s debt during the global financial crisis. Now he may need to help Dilma Rousseff restrain government spending when she becomes president.
Coutinho, 64, Rousseff’s economics professor at Campinas University a decade ago, is in line to become one of her top policy advisers, possibly finance minister, when she takes office Jan. 1, according to Tony Volpon, a Latin America strategist at Nomura Securities International Inc. in New York, and the Eurasia Group, a New York-based research organization.
Rousseff’s finance chief must contain expenditures to meet her campaign pledge of cutting net debt to 30 percent of gross domestic product by 2014 from 41 percent. As head of the Rio de Janeiro-based bank known as BNDES since 2007, Coutinho doubled loans to 137.4 billion reais ($81 billion) by 2009, surpassing the $72.2 billion the World Bank lent globally in the fiscal year ended June 30.
“The role Coutinho plays today at BNDES goes in the opposite direction of what he’d have to do as finance minister,” said Felipe Salto, an economist specializing in public finance at research group Tendencias Consultoria Integrada in Sao Paulo. It’s “unknown” what action Coutinho might take because Rousseff herself has sent mixed messages about her intentions, he said. “Until she gives a clearer sign, people are going to be a little bit in doubt.”
Brazil’s federal domestic debt has jumped 21 percent since the end of 2008, and the Treasury’s injection of 205 billion reais into BNDES is equal to about 75 percent of the increase.
While the government’s cash helped the bank offset a freeze in private funding during Brazil’s deepest recession in more than a decade, the rise in subsidized credit makes it harder for the central bank to bring down interest rates, Ricardo Hausmann, a professor at Harvard University in Cambridge, Massachusetts, said in a telephone interview. At about 6 percent, the inflation-adjusted rate is currently the highest in the Group of 20 nations.
Brazil’s benchmark overnight rate is 10.75 percent, and BNDES lends long-term at 6 percent. Every percentage-point gap between the two rates costs the government about 4 billion reais, Alexandre Schwartsman, chief economist at Banco Santander in Sao Paulo, said in an interview last month.
“Brazil has, de facto, two monetary policies: one run by the central bank and the other one run by BNDES,” said Hausmann, a former chief economist at the Inter-American Development Bank in Washington.
Raised in the northeastern city of Recife, Coutinho adhered to the “developmentalist” school of economic thought that pushed for high tariffs and state-led investment in the 1970s to boost Brazil’s industrial capacity.
He “brilliantly defended” a doctoral thesis in 1974 at Cornell University entitled “The Internationalization of Oligarchy Capitalism,” said Tom Davis, who supervised Coutinho’s study at the Ithaca, New York, school. Coutinho sees “a major role for the state” and probably shares the broad outlook of Keynesian economist and Nobel Prize-winner Paul Krugman, Davis said.
Coutinho returned to Brazil after Cornell and was a member of the Brazil Democratic Movement, one of only two political parties allowed by the country’s 1964-1985 military dictatorship. He served as executive secretary of the science and technology ministry in the 1980s and became an expert on industrial policy, publishing a 510-page study in 1994 on economic competitiveness. He founded LCA Consultores, a Sao Paulo-based consulting company, in 1995.
He was teaching economics at Campinas University when Rousseff was a graduate student at the Sao Paulo state school. While he’s an influential adviser to his former pupil, he isn’t the only candidate for finance chief, said Christopher Garman, Eurasia’s Latin American director. Current Finance Minister Guido Mantega, his deputy Nelson Barbosa and former Finance Minister Antonio Palocci, who served as Rousseff’s main economic aide during the campaign, all are competing with Coutinho for top Cabinet positions, Garman said.
Rousseff may decide to leave Coutinho in his current job or make him an infrastructure “czar,” Nomura’s Volpon said. There is also a small possibility she might name him president of the central bank, he added. In a television interview yesterday, Rousseff said she hasn’t made any decisions yet about her Cabinet.
The expansion in subsidized credit Coutinho pushed at BNDES is controversial in Brazil, as are some of the bank’s loans. Lending totaled 72.6 billion reais through July, even as Latin America’s biggest economy was growing at an annual rate of more than 8.8 percent in the first half of the year, the fastest pace since 1995.
Central bank President Henrique Meirelles said in July that BNDES funding makes monetary policy less efficient and has forced the benchmark rate higher. The yield on the interest-rate futures contract maturing in January 2012 was up three basis points, or 0.03 percentage point, at 11.35 percent at 9:26 a.m. New York time.
The level of subsidies from the development bank also reduces the incentive for companies to seek alternative financing and hurts development of Brazil’s capital markets, said Banco Santander’s Schwartsman.
Billionaire Eike Batista, the country’s richest man, is more enthusiastic, praising BNDES in July as “the best bank in the world,” according to O Globo newspaper. Companies Batista controls, including port operator LLX Logistica SA in Rio de Janeiro, have received long-term funding, which is scarce, for infrastructure investments.
Coutinho, who declined a request to be interviewed, has said BNDES isn’t undermining monetary policy. In a July interview with Estado de S. Paulo newspaper, he said long-term lending by the bank helps fight inflation by increasing the economy’s productive capacity.
Jose Serra, 68, who lost to Rousseff on Oct. 31, criticized the bank during the campaign for helping finance mergers and acquisitions. Last year, Sao Paulo-based JBS SA, the world’s largest beef producer, said it received $2 billion from BNDES to help fund purchases including an $800 million deal for Pittsburg, Texas-based Pilgrim’s Pride Corp.
“All of Brazil’s taxpayers financing one company to buy another?” Serra, who studied with Coutinho at Cornell, said on the “Roda Viva” television program in June. “It just doesn’t make sense.”
One of the top priorities for the next finance minister will be slowing the appreciation of the real, Hausmann said. Higher interest rates are making it more difficult to contain a 36 percent rally against the U.S. dollar since 2009, the third- biggest jump among major currencies tracked by Bloomberg after the South African rand and Australian dollar.
Coutinho said last month that Brazilian businesses hurt by the strong real should use the World Trade Organization’s anti- dumping rules to maintain market share against foreign competitors.
“In the context where there are signs of a currency war, Brazil can’t be naïve,” he told reporters on Oct. 22 in Sao Paulo. “Brazil has to, at a minimum, protect its competitiveness and employment conditions.”
The cost of protecting Brazilian debt against nonpayment for five years with credit-default swaps fell 3 basis points, or 0.03 percentage point to 97 on Nov. 2, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
While Coutinho remains committed to using the state to promote Brazilian industry, he understands that the success of the country’s companies depends on their export competitiveness, said Albert Fishlow, a former professor at Columbia University in New York who is working on a book about Brazil.
“Clearly BNDES was an important component of Brazil’s rapid recovery, and clearly there were excesses in that process,” said Fishlow, who has known Coutinho since the 1970s when Fishlow was a deputy U.S. assistant secretary of state. “Among potential ministers of finance, Coutinho shows a greater experience and less doctrinaire point of view.”
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