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MINISTRY OF FINANCE National Treasury Secretariat BRAZIL: RECENT CHANGES IN MONETARY AND FISCAL POLICIES Fabio de Oliveira Barbosa Secretary of the National Treasury Treasury Management in Latin America EuroFinance Conferences Miami, April 2002 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 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 Macroeconomic Framework July, 1994: Exchange rate as the nominal anchor; targeting monetary aggregates. January, 1999: Inflation targeting framework; floating exchange rate regime. GDP Growth: 1990 - 2002* 6.600 6,0 6.400 4,0 6.200 2,0 6.000 0,0 5.800 5.600 -2,0 GDP Growth Rate * estimate 2002* 2001 2000 1999 1998 1997 1996 1995 1994 -6,0 1993 5.200 1992 -4,0 1991 5.400 Real Growth rate ( %) 8,0 GDP Per Head 1990 R$ per head (2000) 6.800 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. 40 35 30 25 20 15 10 5 0 1 9 94 19 95 1 99 6 FDI 1 99 7 19 98 19 9 9 C u rr e n t A cc o u n t ( d e f ic i t) 2 00 0 2 0 01 Brazil: A New Fiscal Regime Primary targets met for 13 consecutive quarters... P r im a r y R e s ults - P ub lic S ec to r 4 ,0 % GDP 3 ,0 2 ,0 1 ,0 0 ,0 D e c /9 5 D e c /9 6 D e c /9 7 De c /9 8 D e c /9 9 D e c /0 0 -1 ,0 -2 ,0 A c tu al T arg e ts In 1998 the target referred only to the Central Government (0,55%GDP) and it was also met D e c /0 1 ... together with much better distribution of the fiscal effort. 3,03 2,50 2 1 1,19 0,32 -1 0,21 0,70 -0,31 0 deficit 2,84 3 %GDP surplus 4 dez/98 dez/99 dez/00 Central Government Regional Government Source: Central Bank dez/01 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... 60 53,1 43,3 %GDP 40 30 20 10 54,5 49,7 49,4 50 Total 29,9 28,1 33,4 34,6 32,7 30,4 31 12,1 13 9,4 6,6 10,4 6,5 0 1994 1995 * February 33,9 26 18,8 15,9 11,6 5,9 1996 13 2,8 1997 14,7 2,7 1998 16,4 2,8 1999 16,2 2,2 2000 Central Government 18,5 2,0 2001 States and Municipalities 18,5 State-owned enterprises 2,1 2002* ... but also decisive actions towards fiscal transparency, Contingent Liabilities vs. Privatization - Accumulated Results 9,2 %GDP 10% 5% 0% 1998 1999 2000 2001 Contingent liabilities Privatization Source: Central Bank 8,3 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. 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 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 > 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: 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. 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. 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 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. 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 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. 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 % of Total Domestic Debt Maturing in 12 Months 37 53 48 43 38 31 33 28 28 Feb/02 Dec/01 Oct/01 Aug/01 Jun/01 Apr/01 Feb/01 Dec/00 Oct/00 Aug/00 Jun/00 Apr/00 Feb/00 Feb/02 Dec/01 Oct/01 Aug/01 Jun/01 A pr/01 Feb/01 Dec/00 Oct/00 A ug/00 Jun/00 A pr/00 Dec/99 23 25 Feb/00 months 34 Recent Developments: Domestic Debt Great variety and flexibility to deal with distinct macroeconomic environments 80% 70% 60% 55.22 50% 40% 30% 28.70 20% 8,57 10% Fixed Rate Exchange Rate Price Index Feb/02 A ug/01 Apr/01 Jun/01 Feb/01 Oct/01 Dec/00 Jun/00 A ug/00 Apr/00 Feb/00 Oct/99 Dec/99 Jun/99 A ug/99 Feb/99 A pr/99 Dec/98 Oct/98 Jun/98 A ug/98 Feb/98 A pr/98 Oct/97 Dec/97 Aug/97 Feb/97 A pr/97 Dec/96 Jun/97 Floating Rate Oct/01 Dec/01 7,50 0% Effective Steps Towards Capital Market Development ENHANCING TRANSPARENCY: . Disclosure of the Treasury´s 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; Effective Steps Towards Capital Market Development (cont´d) IMPROVING OPERATIONAL PROCEDURES: . Firm bid securities; (price-discovery) auctions for long-term . Reoffer and buy-back mechanisms; . Domestic Exchange ( maturity lengthening, standardization) . Fungibility; standardization of debt instruments; . Dealers: Market makers. fixed-rate Effective Steps Towards Capital Market Development (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 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. 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 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. 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; 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 OUTLOOK 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; # Mexico,Chile: good growth perspectives # Political issues. OUTLOOK BRAZIL:Economic Indicators (Average Market Expectations) 2002 GD P % IPC A % C .A c c .(U S D) FD I (U S D) – as of early April, 2002 2 ,4 5 ,2 20 ,3 17 ,2 2003 3,5 4 20 . 0 18 . 0 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. MINISTRY OF FINANCE National Treasury Secretariat BRAZIL: RECENT CHANGES IN MONETARY AND FISCAL POLICIES Fabio de Oliveira Barbosa Secretary of the National Treasury Treasury Management in Latin America EuroFinance Conferences Miami, April 2002