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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

BRAZIL: RECENT DEVELOPMENTS IN FISCAL POLICY AND PUBLIC DEBT MANAGEMENTFabio BarbosaSecretary of the National TreasuryInter-American Development Bank Washington,D.C., April 2001

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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

slide3

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.
slide5

Current Account Deficit X FDI

1994 a 2001* ( US$ Billion)

FDI

Current Account

* 2001: Accumulated 12 months ended in March.

slide8

Primary Results - 1995-2000

% PIB

Central Govt. (1994-1998) Overall Public Sector (1999-2001)

brazil a new fiscal regime
BRAZIL: A NEW FISCAL REGIME

Net Public Sector Debt

TOTAL

GC

EM

EE

Source: Central Bank

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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
brazil a new fiscal regime11
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.
brazil a new fiscal regime12
BRAZIL: A NEW FISCAL REGIME

Fonte: Banco Central

brazil a new fiscal regime13
BRAZIL: A NEW FISCAL REGIME

Source: Central Bank

brazil a new fiscal regime14
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 )
brazil a new fiscal regime15
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).
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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.
brazil a new fiscal regime18
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.
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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

slide20

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;

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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.

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RECENT DEVELOPMENTS: DOMESTIC DEBT

Lengthening of Average Maturity

slide23

RECENT DEVELOPMENTS: DOMESTIC DEBT

% of Total Debt Maturing in 12 months

slide25

RECENT DEVELOPMENTS: DOMESTIC DEBT

Reduction of Average Funding Cost - Domestic Bonded Debt

external debt
EXTERNAL DEBT

Structure by Holders- Feb/2001

Stock outstanding in March /2001

13,6% PIB

Currency Composition - Feb/2001

Source: National Treasury Secretariat

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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

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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

outlook
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%)
outlook cont
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

outlook cont36
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).
outlook cont37
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.
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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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