Brazilian Debt Management Transparency

Luiz Fernando Alves June, 2015

NATIONAL TREASURY SECRETARIAT: INSTITUTIONAL STRUCTURE 1986

The National Treasury Secretariat is created

Strengthening of public finance and responsible management of public resources

A diretriz para a definição dos objetivos estratégicos e metas foi semelhante à 2012

Public Debt (SUDIP) Fiscal Policy

Avanços em relação a dinâmica das metas participação Subnationalsconjuntas: dos consultores para reuniões quadrimestrais

Statistics and Fiscal Planning MINISTRY OF FINANCE

NATIONAL TREASURY

Governmental Accounting Institutional Development and IT 2

FEDERAL PUBLIC DEBT MANAGEMENT: INSTITUTIONAL STRUCTURE

Public Debt Undersecretariat (DMO)

Operations Department (Front-Office)

Development of short term strategies related to securities issuances in the domestic and external markets; domestic market auctions and external issuances; structured operations.

Strategic Planning Dept (Middle-Office)

Development of medium and long term strategies, risk management, macroeconomic scenario, and investor relations

Control Department (Back-Office)

Register, control and payment of the domestic and external debts, being also responsible for the budget and debt official statistics.

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STRATEGIC PLANNING AND TRANSPARENCY IN BRAZIL

2014

Debt Committee SUDIP is created First Annual and searches for Borrowing Plan benchmarks in the international experience Treasury begins its regular bond issuances

2000

2009

First Annual Debt Report

2003

SUDIP modernization project

2005

• • •

Long Term Optimal Debt Composition Medium Term Planning External debt management

The Brazilian experience is published in a book

1999

1992

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STRATEGIC PLANNING, TRANSPARENCY AND COMMUNICATION » The National Treasury of Brazil has come a long way from transparency to build trust in agents. » Simple and robust indicators are used in the APB and for the long term optimum composition as well as setting targets for these indicators. The ABP set targets for the debt composition and for its maturity structure. » It is essential to publicize the goals and responsibilities of debt management to ensure credibility. Transparency reduced the market uncertainties related to debt management goals and made political decisions more consistent. » There are no demands on law concerning mandatory design and publication of financing strategies, ABP or MTDS. » Nevertheless, Congress has control elements with respect to the management of public debt » There are some legal limits to the public indebtedness level in Brazil, constraining the amount of new credit operations in a year, as well as the stock of debt (net and gross debt) » Besides, the Budgetary Guidelines Law (LDO) requires an assessment of fiscal risks that may arise from public debt. » A report on debt management is also part of an Annual Presidential Message to the Congress. 5

TRANSPARENCY AS GUIDELINES: INSTITUTIONAL RELATIONS UNIT Strategic Planning Dept (Middle-Office) Risk

Scenarios

Investor Relations

Special Studies

 Monitor risk exposure

 Accomplish economic

indicators of public debt, focus on Federal Public Debt;

and financial research;

 Maintain and improve relationship with investors and opinion makers;

 Develop studies on public debt management;

 Identify and propose

the optimal structure of public assets and liabilities;  Elaborate middle and

long term strategy.

 Participate on the

middle and long term financing strategy;

 Broaden the investor

 Monitor, analyze and

 Provide uniformity and

forecast domestic and external scenarios.

publicity on the information about debt management;

base;

 Management of Tesouro

 Research and

development technology to improve the Public Debt management;  Give support in

technical themes related to institutional responsibility of COGEP.

Direto Program.

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TRANSPARENCY AS GUIDELINE: MAIN PUBLICATIONS » In 2001, an Institutional Relations Unit within the Middle Office was created: direct channel with the press, rating

agencies and market agents in order to provide information about the public debt »Main Publications: » The Optimal Federal Public Debt Composition, published in 2011, bringing the desired profile for the debt structure in the medium-term; » The Annual Borrowing Plan, since January 2000, which presents the National Treasury’s

objectives,

guidelines, financing needs, strategies and targets to the end of the year; » The Annual Debt Report, which offers a retrospective analysis of PDM for previous year, describing the goals and targets, and its results. » The Monthly Debt Report, which presents information and statistics on issuances, buybacks, outstanding debt and its average maturity and life, maturity profiles and average costs for the FPD, including domestic and external federal debt, for which the Treasury is responsible. » The Yearly Issuance calendar, which, at the start of each year, list the dates of auctions, as well the types of bonds to be offered in each auction. 7

OBJECTIVE AND GUIDELINES RELEASED SINCE THE FIRST ABP, IN 2001 The objective of the Federal Public Debt Management is that of efficiently meeting the National

Treasury Borrowing Requirements, at the lowest possible long-term financing costs, while ensuring the maintenance of prudent risk levels. Additionally, the aim is to contribute to the smooth operation of the Brazilian government securities market.

To achieve this objective, the guidelines underlying FPD management are as follows: Increase the average maturity of the outstanding debt Smooth the maturity profile, with special attention given to short-term maturities Gradual replacement of floating-rate securities by fixed-rate and inflation-linked instruments Improvement of the External Federal Public Debt (EFPD) profile through issuance of benchmark securities, buyback program and structured operations Development of the yield curve on both domestic and external markets and growth in the liquidity of federal government securities on the secondary market Broadening of the investor base

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DECISION MAKING PROCESS – DEBT MANAGEMENT COMMITTEE Cash Management Domestic Market

Short term Strategy Debt Committee Public Debt UnderSecretary

External Market Head of FrontOffice

MTDS

Head of MiddleOffice

Auction

Treasury Secretary

Head of BackOffice

Technical Staff

Risk Management

Benchmark Medium Term Strategy

Benchmark

Targets Monitoring

Annual Borrowing Plan

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ANNUAL BORROWING PLAN: MAIN INFORMATION DISCLOSED Indicators

2014

Limits for 2015

Long Term Limits Reference

Minimum

Maximum

2,295.9

2,450.0

2,600.0

Fixed Rate

41.6

40.0

44.0

45.0

+/- 2.0

Inflation Linked

34.9

33.0

37.0

35.0

+/- 2.0

Floating Rate

18.7

17.0

22.0

15.0

+/- 2.0

Exchange Rate

4.9

4.0

6.0

5.0

+/- 2.0

% Maturing in 12 months

24.0

21.0

25.0

20.0

+/- 2.0

Av. Maturity (years)

4.4

4.4

4.6

5.5

+/- 0.5

Av. Life (years)

6.6

_

_

_

_

Stock of FPD (R$ bn) FPD Profile (%)

Maturity Structure

» The mid-range indicators for 2015’s indicators show stability for the FPD profile towards the end of the year »Another important guideline relies on lengthening the average maturity, which is expected to reach a new record in 2015. 10

THE DISCLOSURE OF THE ANNUAL TARGETS MAKE THEM BINDING FOR THE DEBT MANAGER: DEBT COMPOSITION Fixed Rate

50

50 40

% of FPD

% of FPD

40

30 20

30 20

10

10

0

0

50

50

Floating Rate

20

% of FPD

30

Exchange Rate

40

40

% of FPD

Inflation Linked

30 20

10

10

0

0

11

50 45 40 35 30 25 20 15 10

% in 12 Months

5

Average Maturity

4

Years

% of FPD

THE DISCLOSURE OF THE ANNUAL TARGETS MAKE THEM BINDING FOR THE DEBT MANAGER: MATURITY STRUCTURE

3

2

12

RETAIL DEBT PROGRAM (TESOURO DIRETO) »

To offer to Brazilian citizens a safe and profitable savings alternative, paring up with the what is available to institutional investors »

Uses roughly the same on-the-run instruments for debt roll-over with the same yields;

» Attractive for low-scale investors: » Low Minimum Ticket (around USD 10); » Competitive Fees;

» Financial Education Purpose: » Provide transparency over the yields paid by the govern to finance itself; » Increase the interest about public debt management and fiscal policy.

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IMPORTANCE OF TRANSPARENCY » Rating Agencies highlight the importance of transparency: » Moodys

» Analysis based on four macro indicators: Economic, Institutional, Fiscal and Risk Exposure. Transparency is key in the institutional factor: “Transparency and accountability of the public sector is a key focus of this indicator.” » S&P » Analysis based on five factors: Political, Economic, Fiscal, External Sector and Monetary Policy. Transparency is key in the Political Factor:

“The transparency and accountability of institutions, data, processes, as well as the coverage and reliability of statistical information” 14

IMPORTANCE OF TRANSPARENCY IN BRAZIL » The S&P, in its 2008 report when Brazil was rated as investment grade, wrote: “Generally pragmatic and predictable policy and fairly transparent institutions have underpinned macroeconomic stability in Brazil. This has facilitated a

sounder foundation for economic growth and fiscal improvement over the past five years.”

» Brazilian Debt Management has been recognized as adopting good practices in transparency: the IIF Report has classified Brazil among the top emerging countries in investor relations 15

LESSONS LEARNED ON GOVERNANCE DIMENSIONS OF DEBT MANAGEMENT STRATEGY

» Debt management requires a well defined (long term) objective and clear guidelines » Transparency itself is a powerful enforcement mechanism to allow the DMO to implement debt strategies according to its preferences and analytical work » The definition of targets involves balancing transparency and flexibility to react to shifting in market conditions, without shifting the long term goal » Institutional aspects are important to support strategy design and dissemination

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For additional information access the National Treasury website: www.tesouro.fazenda.gov.br/en

Or contact Institutional Relations area:

[email protected]

The information on this presentation is issued by the Brazilian Debt Management Office (DMO) for informational purposes. It does not contain and is not an invitation or offer to buy or sell securities. Translation of the original text of this document is provided only for the convenience of the reader. While reasonable care has been taken to ensure the authenticity of the translation, its accuracy cannot be guaranteed. Reliance upon this translation shall be at the reader's own risk. Under no circumstances, shall the Brazilian National Treasury, its officers, employees or agents be liable to the reader or anyone else for any inaccuracy, error, inconsistency, omission, deletion, defect or alteration of the content of the translation from the original Portuguese text, regardless of cause, or for any damages resulting therefore. The original Portuguese text of this document is the only official version, which can be found in http://www.stn.fazenda.gov.br/index.asp. In the event of any discrepancy or contradiction between the Portuguese and translated version, the Portuguese version shall prevail.

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