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Investment, transformation, uncertainty and financing:

the strategic role of national development banks

João Carlos FerrazExecutive Director

IPD/JICA Task Force on Industrial Policy and Transformation Meeting New York, Feb. 19-20, 2015

Development stalemate

Uncertainties and investment financing

Reflections about transformation and development institutions

Guide

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We live in a world of low interest rates…

Source: OECD

Q1-2004

Q3-2004

Q1-2005

Q3-2005

Q1-2006

Q3-2006

Q1-2007

Q3-2007

Q1-2008

Q3-2008

Q1-2009

Q3-2009

Q1-2010

Q3-2010

Q1-2011

Q3-2011

Q1-2012

Q3-2012

Q1-2013

Q3-2013

Q1-20140

1

2

3

4

5

6

Long Term (10 year) interest rates

Germany Switzerland United Kingdom United States

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…with effects on banks and firms’ preferences

Source: Financial Structure Database, 2013

2006 2007 2008 2009 2010 2011 1.31

1.32

1.33

1.34

1.35

1.36

1.37

1.38

1.39

Financial system's credit/deposits ratio (OECD countries non weighted average) Banks hold quality assets (other

reasons being regulatory changes)

Firms reduce debt and increase liquidity

Source: J.P.Morgan

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Investment rate – OECD countries and China

Sluggish investment prevails…

Source: OECD Statistics

2007 2008 2009 2010 2011 201218%

19%

20%

21%

22%

23%

24%

GFCF/Y - OECD+China GFCF/Y - OECD

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… but, “potential” demand is very large…

Source: McKinsey (2013)

For infrastructure to remain at 70% asset-to-GDP ratio => at least $67 trillion of investments between 2013 & 2030

Estimates of infrastructure investments , 2013-2030 ($ trillion)

Developed and developing economies are in much need of ways out of current stalemate

Monetary and fiscal policies, in themselves, do not suffice. “Transformational” policies are in much need.

For the economic transformation of countries, at different stages of development, in good and bad times, innovative development agendas, including priorities and adequate institutional frameworks, must come out.

Transformation, almost by definition, demands and implies investments under the condition of uncertainty

It is argued here that National Development Banks have a strategic role to play in this “ambiance”

Development stalemate and transformation

Development stalemate

Uncertainties and investment financing

Reflections about transformation and development institutions

Guide

The complexity of a project in itself;

The timeframe of the investment;

The prevailing economic conditions;

The unexpected: development challenges.

If uncertainties are inherently embedded in projects leading to structural transformation how are they to be financed? Capital

markets and private banks? Development banks, the sole agent? A combination => resilient and development prone financial

industry?

Uncertainties

Scale

7,4

11,3 12,4

15,5

4,6

21,0

8,0

12,7

KDB BNDES CDB KfW

Outstanding Loans/GDP Outstanding Loans/Total Credit

Outstanding Loans/GDP and Outstanding Loans/Total CreditSelected Development Banks, 2012

Source: Annual reports, BNDES

19.4%

16.3%14.5%

12.7%11.2%

8.3%5.9%

4.7%2.6% 1.7%

KfW -Germany

BNDES -Brazil

CDB -China

KDB -Korea*

ICO -Spain

JFC + JBIC- Japan

DBsMexico*

VEB -Russia

BPI -France*

DBSA -SouthAfrica

Assets/GDP - 2012

2012 total assets: US$ 3.2 trillion

Source: Annual reports, BNDES

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Number of segments supported X number of instruments and asset size: Select International Development Finance Club (IDFC ) members (2012)

Scope

Source: Annual reports.

Each and every priority requires specific expertise, financing instruments and compatible funding

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Macro related uncertainties: the anti-cyclical role of development banks

Annual growth (%) of credit portfolio of selected development banks

Source: Annual reports.

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2005 2006 2007 2008 2009 2010 2011 20120

5

10

15

20

25

30

CDB - China

Time related uncertainty: long term financing at development banks & BNDES

Activity Unit

Installed capacity 2007

(A)

Country projects 2007-2013

(B)

Growth 2007/2013

(B/A)

BNDES supported

projects % BNDES

Large Hydro MW 74,937 12,253 16% 11.893 97%Medium Hydro MW 1,820 3,260 179% 1.994 61%Wind MW 247 1,997 809% 1.093 55%Ethanol million tons 385 235 61% 75 32%Pulp 1.000 ton/year 7,530 6,205 82% 5.515 89%Sources: ANEEL, EPE, BRACELPA, BNDES.. Energy: capacity 2007: interlinked systems as defined by the planning agency EPE

Bloomberg Renewables 29/09/14

2007-2013: US$ 509.2 billion investment in energy by Development Banks

(2007: 38.7; 2009: 69.7; 2011: 93.6)

2013: US$ 84.9 billion Nat Dev Banks: 73.4%; Multilaterals: 26.6%

Brazil, selected industries: expansion of capacity 2007-2013 & BNDES “financing” share

Source: BNDES

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Technical progress related uncertainty: EIB,KfW & BNDES

11.3bn; 50%

1.0bn; 4%

10.3bn; 46%

General SME Finance and Start-upsInnovationEnvironmental and Climate Protection

2013 - KfW financing for innovation, environment and SM + start ups (E$ billion)

EIB financing of innovation

Shiva Dustdar at Mission Oriented Finance for Innovation Seminar,

London, 23/07/14

Vivian Lo at Mission Oriented Finance for Innovation Seminar,

London, 23/07/14 Source: BNDES

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Unexpected development challenges

Caetano Penna & Mariana Mazzucato, presentation at Minds Seminar, Rio 28/07/14 based on data from Climate Policy Initiative (2013)

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Development stalemate

Uncertainties and investment financing

Reflections about transformation and development institutions

Guide

Transformation implies uncertainties of different natures

In order to increase chances of overcoming them, they must be properly understood and be dealt with by proper institutions

Development banks, with certain features, are one of them: they can have a strategic role in inducing transformation-oriented investments, in economies at different stages of development

Transformation and development banks

Tenacious pursuer of priorities defined at the political domain and by challenges associated with the stage of development of a country

As servant of public interests efficiency and effectiveness must be high in their agenda

Stable resources (funding, people, ICT) are critical assets

As development is a dynamic process, flexible competences are required to mobilize resources and instruments adequate to mandates and to country's needs

The substance of mission oriented development banks

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Development Institutions: not the vanguard nor the rearguard …

the co-guard of development

Roles? Patient institutionsCo-developing financial markets. Contribute to systemic stability “Policy supporters”

Concepts? => Analytical frameworks

Economics: market failure, credit rationing, financial repression, investment and financing under uncertainty.

Political economy: mission-oriented, bureaucratic insulation, private/public interactions, State and market mediations

In depth analysis and/or comparative studies?

The extent to which they play mission-oriented role

Economic and financial capabilities and performance

Capabilities and sources of institutional and economic strengths and weaknesses

Efficiency and effectiveness

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Ideas for a research agenda on development banks

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Investment, uncertainty and financing: the strategic role of national development banks

João Carlos FerrazExecutive Director

IPD/JICA Task Force on Industrial Policy and Transformation Meeting New York, Feb. 19-20, 2015