By Rogerio Jelmayer
SAO PAULO (Dow Jones)-In a bid that seeks to promote business growth in the coming years, the Brazilian government and private sector together to expand the domestic debt market.
According to the Brazilian Association of Institutions for Financial Markets and Capital (Anbima) the country would need annual investments of about 280,000 million reais (U.S. $ 176,000 million) to ensure economic growth of 5% annually, without inflationary pressures during the rest of the decade.
However, currently the largest investor Brazil is the government. Even many private plans for expansion are financed by government institutions.
Last year, the National Development Bank (BNDES) disbursed 168,400 million reais, up 24% from 2009 levels. Factory production represented 47% of the loans by the bank, while the infrastructure segment stood at 31%, and trade and services was 16%.
"It is crucial that Brazilian companies have alternative sources of long-term credit," said Manoel Felix Cintra Neto, CEO of the bank Indusval SA, small caps. "We can not rely solely BNDES.
Historically, another important source of financing for Brazilian companies has been the overseas debt market. One advantage is that Brazilian firms can obtain financing for a term of 30 years. However, due to the selectivity among foreign investors, this is an option only for large Brazilian companies that are known.
For long-term financing, the small-and mid-cap BNDES or opt for local commercial banks. But commercial interest rates are soaring. The Brazilian Selic base rate, for example, is 11.75%.
To avoid charges high, but keep pumping oxygen into the expanding Brazilian companies explore alternatives to the debt market.
One possibility is the secondary bond market. But the volumes are still low in Brazil.
"In Brazil, the average daily volume in the debt market side is U.S. $ 115 million, while in the United States is U.S. $ 15,000 million," said Jose Olympio Pereira, director of investment banking branch of Credit Suisse São Paulo. "We need to develop a strategy to change the mentality of Brazilian investors, most of which retain the bonds until maturity."
A major barriers to further market development in Brazil is the lack of a good reference for pricing. The bond prices are tied to changes in the highly volatile day interbank interest rate, known as the DI.
Anbima explores new ways to fix the prices of bonds in the secondary market. Possibilities include creating a domestic interest rate benchmark such as Libor in London and a bond rate related to changes in local inflation.
"We studied a number of possibilities, all designed to develop this market in Brazil and attract individual investors and international," said Joao Teixeira, director of Anbima.
According to Teixeira, the Brazilian debt market is currently dominated by banks and investment funds, most of which purchase private bonds and keep them until maturity.
To encourage companies to enter the local debt market, BNDES plans to invest up to 10,000 million reais this year in bonds issued by Brazilian companies.
"We want to make more room for the private sector. If the bank loans decline this year, that will be good news for us," said Luciano Coutinho, president of BNDES.
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