MINISTRY OF FINANCE National Treasury Secretariat BRAZIL: RECENT CHANGES IN MONETARY BRAZIL: RECENT CHANGES IN MONETARY AND FISCAL POLICIES AND FISCAL POLICIES Fabio de Oliveira Barbosa Fabio de Oliveira Barbosa Secretary of the National Treasury Secretary of the National Treasury Treasury Management in Latin America Treasury Management in Latin America EuroFinance Conferences EuroFinance Conferences Miami, April 2002 Miami, April 2002
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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.
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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
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);
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:
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;
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
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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
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;
. 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.
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;
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.