BRAZIL: RECENT CHANGES IN MONETARY AND FISCAL POLICIES

1
BRAZIL RECENT CHANGES IN MONETARY AND FISCAL
POLICIES
MINISTRY OF FINANCENational Treasury Secretariat

Fabio de Oliveira Barbosa Secretary of the
National Treasury Treasury Management in Latin
AmericaEuroFinance Conferences Miami, April
2002
2
Brazil Recent Changes in Monetary and Fiscal
Policies
1. Macroeconomic Framework 2. Debt Management
Domestic Capital Market Development 3. The New
Brazilian Payments System 4. Outlook
3
Brazil Macroeconomic Framework

• The Real 8 consecutive years of stable
  economic environment, in spite of several
  international crises (Mexico, Asia, Russia,
  Argentina)
• Remarkable transition to the floating exchange
  rate regime
• GDP growth
• New BOP profile
• Declining current account deficit USD 23
  billion (2001) from USD 34 billion (1998)
• Large FDI flows financing C.Account deficit
  USD 22,6 billion (2001)
• Inflation Targeting Framework building a strong
  track record
• A New Fiscal Regime in Place
• - Since 1998, an impressive shift in primary
  flows was delivered
• - Structural reforms
• . Privatization
• . Administrative Reform - Social Security
  Reform
• . States and Local Governments Refinancing
  Agreements
• . Fiscal Responsibility Law

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Macroeconomic Framework
July, 1994 Exchange rate as the nominal anchor
targeting monetary aggregates. January, 1999
Inflation targeting framework floating exchange
rate regime.
5
GDP Growth 1990 - 2002
GDP Per Head
GDP Growth Rate
estimate
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Current Account vs. Foreign Direct
Investment 1994/2001 ( US Billion)
Despite the adverse international scenario, FDI
flows have remained strong, virtually financing a
sharply reduced Current Account Deficit.
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Brazil A New Fiscal Regime
Primary targets met for 13 consecutive quarters...
GDP
In 1998 the target referred only to the Central
Government (0,55GDP) and it was also met
8
... together with much better distribution of
the fiscal effort.
surplus
deficit
Source Central Bank
9
The increase of net public sector debt reflected
not only the fiscal policy and the domestic and
international economic environment in the last 8
years...
Total
Central Government
States and Municipalities
State-owned enterprises
February
10
... but also decisive actions towards fiscal
transparency,
9,2
8,3
Source Central Bank
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Structural Reforms The Fundamentals of a New
Fiscal Regime

• PRIVATIZATION USD 100 billion in the last decade
• Public debt amortization
• Elimination of potential deficits
  (capitalization, subsidies)
• Important role in FDI flows
• Productivity and efficiency gains
• New players in domestic capital markets.

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Structural Reforms The Fundamentals of a New
Fiscal Regime

• Administrative Reform
• Elimination of general job tenure
• Flexible legal regime for civil servants
• Legislative/Judiciary Salary increases must be
  approved by Congress.
• Social Security Reform
• Time of Service replaced by Time of
  Contribution
• Benefit Adjustment Factor link with minimum
  age requirements
• Elimination of the partial benefit at early
  retirement
• New regulatory framework for pension funds
  public sector contribution as sponsor parity
  with employees
• Additional effort Retired civil servants
  contribution-Constitutional Change

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Structural Reforms The Fundamentals of a New
Fiscal Regime

• State Municipalities Refinancing Agreements
  closing of traditional loopholes
• 25 out of 27 states, 180 municipalities US 130
  billion program no arrears
• Main Aspects
• Debt Service Ceiling 13 of Net Current
  Revenue (NCR)
• Debt Stock Ceiling equivalent to 100 of NCR
• Fiscal Programs, annually revised Targets for
  primary surplus, payroll, total debt
• Multi-annual Debt/NCR targets no new money
  while Debt/NCR gt 1
• Implementation of Privatization Programs 30
  total results
• State Banks privatization, closing,
  transformation into development agencies (BANERJ,
  BEMGE, CREDIREAL, BANESPA)
• Incentives to the establishment of balanced
  pension funds (RJ, PE, PR).

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Structural Reforms The Fundamentals of a New
Fiscal Regime

• Fiscal Responsibility Law
• Art.35 No more refinancing between different
  levels of government
• Budget Guidelines Law (LDO) 3-year targets for
  fiscal policy
• Allows for expenditure cuts in other branches of
  government
• Debt ceilings for the three levels of government
• No budget commitment without effective funding
• Transparency reports on fiscal management,
  budget execution, relationship between the
  Treasury and the Central Bank.

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Macroeconomic Framework

• In sum, Brazil has overcome major challenges in
  the last few years
• - Several deep international crises
• - Successful transition to a new set of policies
  inflation targeting framework
• - Gradual Improvement of External Accounts
• - Implementation of a NEW FISCAL REGIME
• comprehensive structural reform agenda
• primary surpluses over 3 of the GDP since
  1999.
• Sound macroeconomic policies are giving room to
• A more proactive public debt management approach,
  and
• Development of the domestic capital markets.

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Brazil Recent Changes in Monetary and Fiscal
Policies
1. Macroeconomic Framework 2. Debt Management
Domestic Capital Market Development 3. The New
Brazilian Payments System 4. Outlook
17
BRAZIL Debt Management Domestic Capital
Market Development

• THE BRAZILIAN NATIONAL TREASURY A KEY ROLE
• The largest securities issuer
• Debt strategy as a reference for market
  participants
• Central Bank no longer a primary issuer.
• The largest equity holder
• Privatization
• Public offering of minority shares.

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BRAZIL DEBT MANAGEMENT STRATEGY

• Predictability, Transparency, Simplicity
• Focus on Domestic Capital Markets
• Objective Cost minimization in the long-term,
  prudent risk levels considered.
• Guidelines
• Refinancing risk at safe levels
• Gradual reduction of market risks
• Short term interest rates exchange rate
  Increasing share of fixed-rate instruments
• Consolidation of the domestic yield curve
• fixed-rate firm bid offer for long-term
  securities regular auction for indexed bonds
• Standardization of debt instruments Domestic
  exchange-offers fungible instruments
• ALM Framework

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Brazil Debt Management Strategy

• External Debt
• Brazil Predictable, regular but moderate
  borrower
• Consolidate Brazilian yield curves in strategic
  markets (USD, EURO, YEN) with liquid benchmarks
• Pave the way for other borrowers to access long
  term financing, not yet available in domestic
  capital markets
• Broadening of the investor base in Brazilian
  risk role in FDI/privatization
• As market conditions allow, gradual retirement of
  restructured debt.

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Recent Developments Domestic Debt
REDUCING REFINANCING RISK- improved debt profile
- gradual increase of the average life- focus
on short term maturities (up to 12 months)- cash
management
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Recent Developments Domestic Debt
Great variety and flexibility to deal with
distinct macroeconomic environments
55.22
28.70
8,57
7,50
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Effective Steps Towards Capital Market Development

• ENHANCING TRANSPARENCY
• . Disclosure of the Treasurys Annual Borrowing
  Plan
• . Monthly schedule for Treasury auctions reduced
  auction events
• . Incentive to electronic trading systems
• . Regular meetings with dealers, institutional
  investors and rating agencies
• . Standardization of debt statistics
  (methodology/ nomenclature).
• . Code of Conduct for Public Debt Managers

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Effective Steps Towards Capital Market
Development (contd)

• IMPROVING OPERATIONAL PROCEDURES
• . Firm bid (price-discovery) auctions for
  long-term fixed-rate securities
• . Reoffer and buy-back mechanisms
• . Domestic Exchange ( maturity lengthening,
  standardization)
• . Fungibility standardization of debt
  instruments
• . Dealers Market makers.

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Effective Steps Towards Capital Market
Development (contd)

• TREASURY DIRECT PROGRAM Main objectives
• Direct access to Treasuries through the Internet
  reduced minimum investment
• Incentive to long term saving
• Spread information about public debt
• Features
• - Brazil is one of the few countries in the
  world where this option is available
• - Settlement through financial institutions
• - Pricing according to market rates.
• Main Statistics Since Start Up (January,2002)
• - Over 3.000 investors 155 cities, 24
  states
• - 31 of total transactions under US 400
• - Average investment US 3.600 minimum
  US 70.

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Effective Steps Towards Capital Market
Development

• Consolidation of the Financial System
• PROER, PROES, Federal Institutions (BB, CEF, BNB,
  BASA)
• Successful Public Offerings PETROBRAS, CVRD
• Development of a vast investors base in domestic
  markets (over 700 thousand investors bought CVRD
  shares)
• New Market Tag Along, US GAAP, Ordinary shares.
• New Corporate Law Shareholders rights enhanced
• Direct incentives towards good governance (CVM,
  BNDES)
• CVM (Brazilian SEC) Formal legal and operational
  autonomy.

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Brazil Recent Changes in Monetary and Fiscal
Policies
1. Macroeconomic Framework 2. Debt Management
Domestic Capital Market Development 3. The New
Brazilian Payments System 4. Outlook
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The New Brazilian Payment System

• Brazil already has one of the most solid Payments
  System around the world. However, improvements
  are required major part of the payments is done
  without guarantees final settlements with a one
  day lag.
• The new Brazilian Payment System (to be
  implemented in April 22, 2002) has the following
  objectives
• Reduce systemic risk Central Bank no longer
  bearing the risk
• Increase settlement efficiency
• Enhance secondary market liquidity for debt
  instruments
• Incentive to more competitive financial services
  and
• Potential increase of domestic credit supply.

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Main Advantages of the New Brazilian Payment
System

• Expected Results
• Private Risk within Private Sector
• Financial System Further Strengthening
• Cost reduction for financial transactions
• Lower Credit Risk
• Development of new products/electronic transfers

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Brazil Recent Changes in Monetary and Fiscal
Policies
1. Macroeconomic Framework 2. Debt Management
Domestic Capital Market Development 3. The New
Brazilian Payments System 4. Outlook
30
OUTLOOK

• More favorable international scenario is
  prevailing
• Stronger than anticipated US economys
  performance
• European economies gradual recovery
• Improved perspectives for international
  liquidity
• Oil prices some volatility
• Latin America
• Argentina limited effects in 2002
• Mexico,Chile good growth perspectives
• Political issues.

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OUTLOOK

• BRAZILEconomic Indicators (Average Market
  Expectations)
• 2002 2003
• as of early April, 2002

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OUTLOOK

• FISCAL POLICY
• 2002 3,5 Primary Surplus is being delivered as
  expected
• 2003 to 2005 Target 3,5 of the GDP (Budget
  Law)
• At least 7 consecutive years of strong fiscal
  performance
• MONETARY POLICY shocks managed over a reasonable
  timeframe
• DEBT MANAGEMENT DOMESTIC CAPITAL MARKETS
• Sustain current public debt rollover risk
• Average maturity around 3yr Short term
  below 29 of total debt.
• Further duration increase 15 months by year
  end
• Banco do Brasil New Market Public offering in
  2002.

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BRAZIL RECENT CHANGES IN MONETARY AND FISCAL
POLICIES
MINISTRY OF FINANCENational Treasury Secretariat

Fabio de Oliveira Barbosa Secretary of the
National Treasury Treasury Management in Latin
AmericaEuroFinance Conferences Miami, April
2002