BRAZIL: RECENT CHANGES IN MONETARY AND FISCAL POLICIES

1. BRAZIL: RECENT CHANGES IN MONETARY AND FISCAL POLICIES

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

8. ... together with much better distribution of the fiscal effort.

11. 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.

12. 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

13. 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).

14. 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.

15. 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.

17. 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.

18. 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

19. 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.

22. 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;

23. 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.

24. 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.

25. 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.

27. 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. The New Brazilian Payment System

28. 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; Main Advantages of the New Brazilian Payment System

30. 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.

31. OUTLOOK BRAZIL:Economic Indicators (Average Market Expectations) 2002 2003 as of early April, 2002

32. 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

33. BRAZIL: RECENT CHANGES IN MONETARY AND FISCAL POLICIES