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.