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FEDERATIVE REPUBLIC of BRAZIL Ministry of Finance - National Treasury Secretariat

FEDERATIVE REPUBLIC of BRAZIL Ministry of Finance - National Treasury Secretariat. BRAZIL: RECENT DEVELOPMENTS IN FISCAL POLICY AND PUBLIC DEBT MANAGEMENT Fabio Barbosa Secretary of the National Treasury Inter-American Development Bank Washington,D.C., April 2001.

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FEDERATIVE REPUBLIC of BRAZIL Ministry of Finance - National Treasury Secretariat

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  1. FEDERATIVE REPUBLIC of BRAZIL Ministry of Finance - National Treasury Secretariat BRAZIL: RECENT DEVELOPMENTS IN FISCAL POLICY AND PUBLIC DEBT MANAGEMENTFabio BarbosaSecretary of the National TreasuryInter-American Development Bank Washington,D.C., April 2001

  2. BRAZIL: RECENT DEVELOPMENTS IN FISCAL POLICY AND PUBLIC DEBT MANAGEMENT 1.Adjustment and Reforms Towards a New Fiscal Regime 2.Public Debt Management 3.Outlook

  3. BRAZIL: RECENT DEVELOPMENTS IN FISCAL POLICY AND PUBLIC DEBT MANAGEMENT • BRAZILIAN ECONOMY: OVERCOMING MAJOR CHALLENGES • Macroeconomic Stabilization; • International Crises : Mexico, Asia, Russia; • Remarkable transition to the floating exchange rate regime: • # Inflation Targeting framework: successful implementation; • # Balance of Payments Adjustment: • ** Despite the world’s economy slowdown, exports have been growing at impressive rates (March 01 = 15,5%); • ** Current Account Deficit financed through FDI; • # Economy has rebounded; unemployment is declining; • # New Fiscal Regime: • ** Strong primary flows; Structural Reforms.

  4. Inflation Targeting FrameworkConsumer Price Index - IPCA (Annual % )

  5. Current Account Deficit X FDI 1994 a 2001* ( US$ Billion) FDI Current Account * 2001: Accumulated 12 months ended in March.

  6. GDP Growth: 1990 - 2000

  7. Unemployment RateIBGE Monthly Employment Research

  8. Primary Results - 1995-2000 % PIB Central Govt. (1994-1998) Overall Public Sector (1999-2001)

  9. BRAZIL: A NEW FISCAL REGIME Net Public Sector Debt TOTAL GC EM EE Source: Central Bank

  10. Strong primary flows must be seen as an integral part of the comprehensive structural reforms agenda, which has been implemented in the last few years. • The “fundamentals” of Brazil’s New Fiscal Regime: • Privatization • Administrative Reform • Social Security Reform • State & Municipalities Refinancing Agreements • Fiscal Responsibility Law

  11. BRAZIL: A NEW FISCAL REGIME • Privatization: • Since 1991: About US$ 100,4 billion: • (*) Proceeds: US$ 82,3 billion (mostly to amortize public debt) • (*) Debt Transferred: US$ 18,1 billion. • Positive effects go far beyond debt reduction: • (*) Elimination of potential deficits (capitalization, subsidies); • (*) Important role in FDI flows; • (*) Productivity and efficiency gains; • (*) New players in domestic capital markets.

  12. BRAZIL: A NEW FISCAL REGIME Fonte: Banco Central

  13. BRAZIL: A NEW FISCAL REGIME Source: Central Bank

  14. BRAZIL: 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: • Retirement: “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 cannot be higher than civil servants’; • Retired civil servants contribution (Constitutional Amendment )

  15. BRAZIL: A NEW FISCAL REGIME • State & Municipalities Refinancing Agreements: • 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 trajectory; no “new money” while Debt/NCR > 1; • # Implementation of Privatization Programs: responded for 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).

  16. Primary Results (% GDP)1995-2000States, Municipalities and State Enterprises

  17. BRAZIL: A NEW FISCAL REGIME • Fiscal Responsibility Law: Milestone in Fiscal Management • Art.35: No more refinancing between different levels of government; • Budget Guidelines Law (LDO): 3-years targets for fiscal policy; • Allows for expenditure cuts in other branches of government; • Debt ceilings for the three levels of government • Federal Government: 3,5 NCR, effective immediately; • States: 2 NCR; Municipalities 1,2 NCR; • Convergence period: 15 years; • Implicit reduction of S&M net debt (as of Dec. 2000, 16,3% of the GDP) • No budget commitment without effective funding; • Transparency: reports on fiscal management, budget execution, etc.

  18. BRAZIL: A NEW FISCAL REGIME • In sum: • A comprehensive structural reforms agenda has been implemented. • The impressive shift in primary flows (about 5% of the GDP if compared to 1997) consolidates the new fiscal regime, thus enhancing the consistency of the Brazilian economic policy : • (*)TARGETS MET FOR 10 CONSECUTIVE QUARTERS • Sound macroeconomic policies pave the way to: • A more proactive public debt management strategy; • Development of domestic capital markets.

  19. BRAZIL: RECENT DEVELOPMENTS IN FISCAL POLICY AND PUBLIC DEBT MANAGEMENT 1.Adjustment and Reforms Towards a New Fiscal Regime 2.Public Debt Management 3.Outlook

  20. PUBLIC DEBT MANAGEMENTGuidelines DOMESTIC DEBT:Maturity lengthening process: reduction of refinancing risk;Duration: Gradual replacement of floating rate by fixed rate securities;Rebuilding of domestic yield curve: Fixed rate (LTN): short term benchmarks: up to 2 years Floating rate (LFT): 5 years Indexed bonds (NTN-C): (3,5,7,10,20 and 30 years)Standardization of debt instruments; fungibility for floating rate securities; re-offer;

  21. PUBLIC DEBT MANAGEMENTGuidelines EXTERNAL DEBTEstablishment/consolidation of yield curves in strategic markets; benchmarks in dollar, euro and yen;Provide and enhance access for other borrowers to the international capital markets;Gradual substitution of restructured debt (Bradies, Paris Club) by market instruments; Broadening of the investors base in Brazilian risk.

  22. RECENT DEVELOPMENTS: DOMESTIC DEBT Lengthening of Average Maturity

  23. RECENT DEVELOPMENTS: DOMESTIC DEBT % of Total Debt Maturing in 12 months

  24. Replacement of floating rate by fixed rate securities

  25. RECENT DEVELOPMENTS: DOMESTIC DEBT Reduction of Average Funding Cost - Domestic Bonded Debt

  26. External Debt: Yield Curves

  27. EXTERNAL DEBT Structure by Holders- Feb/2001 Stock outstanding in March /2001 13,6% PIB Currency Composition - Feb/2001 Source: National Treasury Secretariat

  28. ANNUAL BORROWING PLAN (ABP) STRATEGY FOR 2001 Basic Parameters:Projected Debt Service 2001 *: R$ 201,8 billion Fiscal resources budgeted: R$ 54,4 bilhões Gross Borrowing Requirements: R$ 147,4 bilhões  Hipotheses: a) 100% roll-over of dollar linked securities; and b) bond issuance in international capital markets: US$ 6 billion*As of December 31, 2000

  29. ANNUAL BORROWING PLAN (ABP) STRATEGY FOR 2001

  30. ANNUAL BORROWING PLAN (ABP) STRATEGY FOR 2001 Estimated Results (Base Case)

  31. ANNUAL BORROWING PLAN (ABP) 1st. Quarter Results

  32. ANNUAL BORROWING PLAN (ABP) 1st. Quarter Results

  33. BRAZIL: RECENT DEVELOPMENTS IN FISCAL POLICY AND PUBLIC DEBT MANAGEMENT 1.Adjustment and Reforms Towards a New Fiscal Regime 2.Public Debt Management 3.Outlook

  34. OUTLOOK • GDP Growth: • Average 2000/2002: above 4.0% p.a.; • Further decline of unemployment rate: • Average Rate in 2001 below 7.0% (1999, 7.6% - 2000, 7.1%); • Balance of Payments: • Current Account Deficit: close to 2000 level, mostly (80%) financed through FDI; • Inflation: • IPCA 2001 = 4.0% (+ ou - 2.0%) • IPCA 2002 = 3.5% (+ ou - 2.0%)

  35. OUTLOOK (cont.) • Fiscal Policy: • Structural adjustment: reforms implemented; • Privatization/IPO/concessions; • Annual Primary Surpluses: 2001 to 2004: 3.0% of the GDP • 6 consecutive years:primary surpluses of,at least, 3.0 % of the GDP. Primary Result - Public Sector* (%GDP) *Primary Surplus for 2004 in LDO 2001 considers the same trend observed between 2002 and 2003

  36. OUTLOOK (cont.) • Public Debt Management • Average Maturity Lengthening: Dec/2001 = 42,9 months • Duration: gradual increase of share and average maturity of fixed rate instruments; • Consolidation of long term benchmarks ( NTN-C): • Focus on intermediate maturities (today’s auction - 20yr;10.7%p.a.) • Standardization of debt instruments. • Internet Sales : Small investor, enhancing perception about public debt (Brazilian Treasuries: a first class asset).

  37. OUTLOOK (cont.) • Economic Policy: Consistency, Flexibility and Reaction • Recent Turbulences: • Fundamentals must prevail; • Immediate Policy Response: • Primary surplus targets increase for 2002/2004 (LDO for 2002); • Tightening of monetary policy; exchange rate flexibility; • Tactical adjustment of auctions schedulle.

  38. FEDERATIVE REPUBLIC of BRAZIL Ministry of Finance - National Treasury Secretariat BRAZIL: RECENT DEVELOPMENTS IN FISCAL POLICY AND PUBLIC DEBT MANAGEMENTFabio BarbosaSecretary of the National TreasuryInter-American Development Bank Washington-DC, April de 2001

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