Post on 17-Dec-2015
MINISTRY OF FINANCENational Treasury Secretariat
BRAZIL: RECENT CHANGES IN MONETARY BRAZIL: RECENT CHANGES IN MONETARY AND FISCAL POLICIES AND FISCAL POLICIES
Fabio de Oliveira BarbosaFabio de Oliveira Barbosa Secretary of the National Treasury Secretary of the National Treasury
Treasury Management in Latin AmericaTreasury Management in Latin AmericaEuroFinance ConferencesEuroFinance Conferences
Miami, April 2002 Miami, April 2002
1. Macroeconomic Framework1. Macroeconomic Framework
2. Debt Management & Domestic Capital Market Development2. Debt Management & Domestic Capital Market Development
3. The New Brazilian Payments System 3. The New Brazilian Payments System
4. Outlook4. Outlook
1. Macroeconomic Framework1. Macroeconomic Framework
2. Debt Management & Domestic Capital Market Development2. Debt Management & Domestic Capital Market Development
3. The New Brazilian Payments System 3. The New Brazilian Payments System
4. Outlook4. Outlook
Brazil: Recent Changes in Monetary and Fiscal Policies
Brazil: Macroeconomic FrameworkBrazil: Macroeconomic Framework
The Real : 8 consecutive years of stable economic environment, in spite of The Real : 8 consecutive years of stable economic environment, in spite of several international crises (Mexico, Asia, Russia, Argentina)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); # 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) # 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
Cons umer Pr ice Inde x (IPCA)
4 0,5 9 22,41 9,5 65 ,01
1,6 68,9 4 5,97 7 ,67
10 .44 4,61
% p
.a.
July, 1994: Exchange rate as the nominal anchor; targeting monetary aggregates.
January, 1999: Inflation targeting framework; floating exchange rate regime.
July, 1994: Exchange rate as the nominal anchor; targeting monetary aggregates.
January, 1999: Inflation targeting framework; floating exchange rate regime.
Macroeconomic FrameworkMacroeconomic FrameworkMacroeconomic FrameworkMacroeconomic Framework
5.200
5.400
5.600
5.800
6.000
6.200
6.400
6.600
6.80019
90
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
*
R$ p
er
hea
d (2
000)
-6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
8,0
Real
Gro
wth
rat
e (
%)
GDP Growth: 1990 - 2002*GDP Growth: 1990 - 2002*GDP Growth: 1990 - 2002*GDP Growth: 1990 - 2002*
GDP Per HeadGDP Per Head
GDP Growth RateGDP Growth Rate
* estimate* estimate
Current Account vs. Foreign Direct InvestmentCurrent Account vs. Foreign Direct Investment1994/2001 ( US$ Billion)1994/2001 ( US$ Billion)
Current Account vs. Foreign Direct InvestmentCurrent Account vs. Foreign Direct Investment1994/2001 ( US$ Billion)1994/2001 ( US$ Billion)
Despite the adverse international scenario, FDI flows have remained strong, virtually financing a sharply reduced Current Account Deficit.
0
5
10
15
20
25
30
35
40
1994 1995 1996 1997 1998 1999 2000 2001
FDI Current Account (deficit)
In 1998 the target referred only to the Central Government (0,55%GDP) and it was also met
% G
DP
Primary targets met for 13 consecutive quarters...
Brazil: A New Fiscal Regime
Primary Results - Public Sector
-2,0
-1,0
0,0
1,0
2,0
3,0
4,0
Dec/95 Dec/96 Dec/97 Dec/98 Dec/99 Dec/00 Dec/01
Actual Targets
surp
lus
defic
it
Source: Central Bank
... together with much better distribution of the fiscal effort.
0,32
3,03 2,842,50
0,210,70
1,19
-0,31
-1
0
1
2
3
4
dez/98 dez/99 dez/00 dez/01
% G
DP
Central Government Regional Government
Total
States and Municipalities
State-owned enterprises
Central Government
* February
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...
33 ,9
9 ,4 10 ,4
18 ,5
2 ,1
54 ,5
32 ,7
12 ,1 1315,9
18 ,8
2630 ,4 31
18 ,516 ,216 ,414 ,71311,6
2 ,06 ,6 6 ,5 5,9 2 ,8 2 ,7 2 ,8 2 ,2
53 ,1
28 ,129 ,9
33 ,434 ,6
43 ,349 ,7 49 ,4
0
10
20
30
40
50
60
1994 1995 1996 1997 1998 1999 2000 2001 2002*
%G
DP
0%
5%
10%
% G
DP
1998 1999 2000 2001
Continge nt Liabilit ies vs . Pr ivatization - Accumulated Re s ults
Contingent liabilities Privatization
Source: Central Bank
... but also decisive actions towards fiscal transparency,
9,29,28,38,3
– 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.
Structural Reforms: Structural Reforms: The Fundamentals of a New Fiscal RegimeThe Fundamentals of a New Fiscal Regime
Structural Reforms: Structural Reforms: The Fundamentals of a New Fiscal RegimeThe Fundamentals of a New Fiscal Regime
Structural Reforms: Structural Reforms: The Fundamentals of a New Fiscal RegimeThe Fundamentals of a New Fiscal Regime
Administrative Reform: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: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
State & Municipalities Refinancing Agreements: closing of traditional State & Municipalities Refinancing Agreements: closing of traditional “loopholes”“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 > 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).
Structural Reforms: Structural Reforms: The Fundamentals of a New Fiscal RegimeThe Fundamentals of a New Fiscal Regime
Structural Reforms: Structural Reforms: The Fundamentals of a New Fiscal RegimeThe Fundamentals of a New Fiscal Regime
Fiscal Responsibility LawFiscal Responsibility Law
Art.35: No more refinancing between different levels of government;Art.35: No more refinancing between different levels of government;
Budget Guidelines Law (LDO): 3-year targets for fiscal policy;Budget Guidelines Law (LDO): 3-year targets for fiscal policy;
Allows for expenditure cuts in other branches of government;Allows for expenditure cuts in other branches of government;
Debt ceilings for the three levels of governmentDebt ceilings for the three levels of government
No budget commitment without effective funding; No budget commitment without effective funding;
Transparency: reports on fiscal management, budget execution, Transparency: reports on fiscal management, budget execution, relationship between the Treasury and the Central Bank.relationship between the Treasury and the Central Bank.
In sum, Brazil has overcome major challenges in the last few In sum, Brazil has overcome major challenges in the last few years:years:
- Several deep international crises;- Several deep international crises;
- Successful transition to a new set of policies: inflation targeting framework;- Successful transition to a new set of policies: inflation targeting framework;
- Gradual Improvement of External Accounts; - Gradual Improvement of External Accounts;
- Implementation of a NEW FISCAL REGIME:- Implementation of a NEW FISCAL REGIME:
# comprehensive structural reform agenda;# comprehensive structural reform agenda;
# primary surpluses over 3% of the GDP since 1999.# primary surpluses over 3% of the GDP since 1999.
Sound macroeconomic policies are giving room to:Sound macroeconomic policies are giving room to:
– A more proactive public debt management approach, and
– Development of the domestic capital markets.
Macroeconomic FrameworkMacroeconomic FrameworkMacroeconomic FrameworkMacroeconomic Framework
1. Macroeconomic Framework1. Macroeconomic Framework
2. Debt Management & Domestic Capital Market Development2. Debt Management & Domestic Capital Market Development
3. The New Brazilian Payments System 3. The New Brazilian Payments System
4. Outlook4. Outlook
1. Macroeconomic Framework1. Macroeconomic Framework
2. Debt Management & Domestic Capital Market Development2. Debt Management & Domestic Capital Market Development
3. The New Brazilian Payments System 3. The New Brazilian Payments System
4. Outlook4. Outlook
Brazil: Recent Changes in Monetary and Fiscal Policies
BRAZIL: Debt Management & BRAZIL: Debt Management & Domestic Capital Market DevelopmentDomestic Capital Market Development
THE BRAZILIAN NATIONAL TREASURY: A KEY ROLETHE BRAZILIAN NATIONAL TREASURY: A KEY ROLE
– The largest securities issuer;
# Debt strategy as a reference for market participants;# Debt strategy as a reference for market participants;
# Central Bank no longer a primary issuer.# Central Bank no longer a primary issuer.
– The largest equity holder:
# Privatization;# Privatization;
# Public offering of minority shares.# Public offering of minority shares.
BRAZIL: DEBT MANAGEMENT STRATEGYBRAZIL: DEBT MANAGEMENT STRATEGY
Predictability, Transparency, SimplicityPredictability, Transparency, Simplicity
– Focus on Domestic Capital Markets
Objective: Cost minimization in the long-term, prudent risk levels considered.Objective: Cost minimization in the long-term, prudent risk levels considered.
Guidelines:Guidelines:
# Refinancing risk at safe levels;# Refinancing risk at safe levels;
# Gradual reduction of market risks: # Gradual reduction of market risks:
* Short term interest rates; exchange rate; Increasing share of fixed-rate * Short term interest rates; exchange rate; Increasing share of fixed-rate instrumentsinstruments
# Consolidation of the domestic yield curve: # Consolidation of the domestic yield curve:
* fixed-rate: firm bid offer for long-term securities* fixed-rate: firm bid offer for long-term securities ;; regular auction for indexed regular auction for indexed bonds;bonds;
# Standardization of debt instruments: Domestic exchange-offers; fungible instruments;# Standardization of debt instruments: Domestic exchange-offers; fungible instruments;
# ALM Framework# ALM Framework
Brazil: Debt Management StrategyBrazil: Debt Management StrategyBrazil: Debt Management StrategyBrazil: Debt Management Strategy
External DebtExternal 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.
Recent Developments: Domestic Debt Recent Developments: Domestic Debt Recent Developments: Domestic Debt 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
Lengthening of the Average Maturity
25
28
31
34
37
Feb/
00
Apr
/00
Jun/
00
Aug
/00
Oct
/00
Dec
/00
Feb/
01
Apr
/01
Jun/
01
Aug
/01
Oct
/01
Dec
/01
Feb/
02
mon
ths
% of Total Domestic Debt Maturing in 12 Months
23
28
33
38
43
48
53
Dec
/99
Feb/
00
Apr
/00
Jun/
00
Aug
/00
Oct
/00
Dec/
00
Feb/
01
Apr
/01
Jun/
01
Aug
/01
Oct
/01
Dec/
01
Feb/
02
0%
10%
20%
30%
40%
50%
60%
70%
80%
De
c/9
6
Fe
b/9
7
Ap
r/9
7
Jun
/97
Au
g/9
7
Oc
t/9
7
De
c/9
7
Fe
b/9
8
Ap
r/9
8
Jun
/98
Au
g/9
8
Oc
t/9
8
De
c/9
8
Fe
b/9
9
Apr
/99
Jun
/99
Au
g/9
9
Oc
t/9
9
De
c/9
9
Fe
b/0
0
Ap
r/0
0
Jun
/00
Au
g/0
0
Oc
t/0
1
De
c/0
0
Fe
b/0
1
Ap
r/0
1
Jun
/01
Au
g/0
1
Oc
t/0
1
De
c/0
1
Fe
b/0
2
Floating Rate Fixed Rate Exchange Rate Price Index
55.2255.22
28.7028.70
8,578,57
7,507,50
Great variety and flexibility to deal with distinct macroeconomic environments
Recent Developments: Domestic Debt Recent Developments: Domestic Debt Recent Developments: Domestic Debt Recent Developments: Domestic Debt
Effective Steps Towards Capital Market DevelopmentEffective Steps Towards Capital Market DevelopmentEffective Steps Towards Capital Market DevelopmentEffective Steps Towards Capital Market Development
ENHANCING TRANSPARENCY:ENHANCING TRANSPARENCY:
. . Disclosure of the Treasury´s Annual Borrowing PlanDisclosure of the Treasury´s Annual Borrowing Plan
. M. Monthly schedule for Treasury auctions; reduced auction events;onthly schedule for Treasury auctions; reduced auction events;
. . Incentive to electronic trading systems;Incentive to electronic trading systems;
. Regular meetings with dealers, institutional investors and rating . Regular meetings with dealers, institutional investors and rating agencies;agencies;
. . Standardization of debt statistics (methodology/ nomenclature).
. Code of Conduct for Public Debt Managers;. Code of Conduct for Public Debt Managers;
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.
Effective Steps Towards Capital Market DevelopmentEffective Steps Towards Capital Market Development(cont´d) (cont´d)
Effective Steps Towards Capital Market DevelopmentEffective Steps Towards Capital Market Development(cont´d) (cont´d)
Effective Steps Towards Capital Market DevelopmentEffective Steps Towards Capital Market Development(cont´d) (cont´d)
Effective Steps Towards Capital Market DevelopmentEffective Steps Towards Capital Market Development(cont´d) (cont´d)
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.
Effective Steps Towards Capital Market DevelopmentEffective Steps Towards Capital Market DevelopmentEffective Steps Towards Capital Market DevelopmentEffective Steps Towards Capital Market Development
Consolidation of the Financial System
– PROER, PROES, Federal Institutions (BB, CEF, BNB, BASA)
Successful Public Offerings: PETROBRAS, CVRDPETROBRAS, 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)Direct incentives towards good governance (CVM, BNDES)
CVM (Brazilian SEC): Formal legal and operational autonomy.CVM (Brazilian SEC): Formal legal and operational autonomy.
1. Macroeconomic Framework1. Macroeconomic Framework
2. Debt Management & Domestic Capital Market Development2. Debt Management & Domestic Capital Market Development
3. The New Brazilian Payments System 3. The New Brazilian Payments System
4. Outlook4. Outlook
1. Macroeconomic Framework1. Macroeconomic Framework
2. Debt Management & Domestic Capital Market Development2. Debt Management & Domestic Capital Market Development
3. The New Brazilian Payments System 3. The New Brazilian Payments System
4. Outlook4. Outlook
Brazil: Recent Changes in Monetary and Fiscal Policies
Brazil already has one of the most solid Payments System around the world. 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 However, improvements are required: major part of the payments is done without guarantees; final settlements with a one day lag. guarantees; final settlements with a one day lag.
The new Brazilian Payment System (to be implemented in April 22, 2002) has the The new Brazilian Payment System (to be implemented in April 22, 2002) has the following objectives:following objectives:
Reduce systemic risk; Central Bank no longer bearing the risk;Reduce systemic risk; Central Bank no longer bearing the risk;
Increase settlement efficiency;Increase settlement efficiency;
Enhance secondary market liquidity for debt instruments;Enhance secondary market liquidity for debt instruments;
Incentive to more competitive financial services; andIncentive to more competitive financial services; and
Potential increase of domestic credit supply.Potential increase of domestic credit supply.
The New Brazilian Payment SystemThe New Brazilian Payment System
– Expected Results:
Private Risk within Private Sector;Private Risk within Private Sector;
Financial System: Further Strengthening;Financial System: Further Strengthening;
Cost reduction for financial transactions;Cost reduction for financial transactions;
Lower Credit Risk;Lower Credit Risk;
Development of new products/electronic transfers;Development of new products/electronic transfers;
Main Advantages of the New Main Advantages of the New Brazilian Payment SystemBrazilian Payment System
1. Macroeconomic Framework1. Macroeconomic Framework
2. Debt Management & Domestic Capital Market Development2. Debt Management & Domestic Capital Market Development
3. The New Brazilian Payments System 3. The New Brazilian Payments System
4. Outlook4. Outlook
1. Macroeconomic Framework1. Macroeconomic Framework
2. Debt Management & Domestic Capital Market Development2. Debt Management & Domestic Capital Market Development
3. The New Brazilian Payments System 3. The New Brazilian Payments System
4. Outlook4. Outlook
Brazil: Recent Changes in Monetary and Fiscal Policies
OUTLOOKOUTLOOK
More favorable international scenario is prevailing:More favorable international scenario is prevailing:– Stronger than anticipated US economy´s performance;
– European economies: gradual recovery
– Improved perspectives for international liquidity;
– Oil prices: some volatility;
– Latin America:# Argentina: limited effects in 2002;# Argentina: limited effects in 2002;# Mexico,Chile: good growth perspectives# Mexico,Chile: good growth perspectives# Political issues.# Political issues.
OUTLOOK OUTLOOK
BRAZIL:Economic Indicators (Average Market Expectations)BRAZIL:Economic Indicators (Average Market Expectations)
20022002 20032003
– as of early April, 2002
GDP % 2,4 3,5IPCA % 5,2 4C.Acc.(USD) 20,3 20.0FDI (USD) 17,2 18.0
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.
OUTLOOK
MINISTRY OF FINANCENational Treasury Secretariat
BRAZIL: RECENT CHANGES IN MONETARY BRAZIL: RECENT CHANGES IN MONETARY AND FISCAL POLICIES AND FISCAL POLICIES
Fabio de Oliveira BarbosaFabio de Oliveira Barbosa Secretary of the National Treasury Secretary of the National Treasury
Treasury Management in Latin AmericaTreasury Management in Latin AmericaEuroFinance ConferencesEuroFinance Conferences
Miami, April 2002 Miami, April 2002