S E P T E M B E R B U I L D I N G A D E B T S T R A T E G Y : T H E B R A Z I L I A N E X P E R I E N C E Anderson Caputo D. Silva Head of Public Debt Strategic Planning Department Brazilian National Treasury LAC DEBT GROUP: DEBT STRATEGY WORKSHOP Washington, DC, USA, 2005

Ministério da FazendaTesouroNacional Debt Strategy: From the Objective to the Actual Implementation and Monitoring - Main Objective “ Minimize long-term costs, subject to prudent risk levels” - Scope of Action  Search for a Benchmark – What is the optimal debt composition (steady-state) in terms of types of instruments, maturities and currencies?  Strategic Planning – How fast should (can) we get to the Benchmark? Annual Borrowing Plan and Medium-term borrowing strategies  Planning and Risk Monitoring - Likelihood of meeting targets for debt profile, exposure to different types of risks (refinancing, market, budget, legal, etc.) 1

Ministério da FazendaTesouroNacional T H E S E A R C H F O R A B E N C H M A R K 2

Ministério da FazendaTesouroNacional Benchmark Studies – Some Key References in DMOs and Elsewhere 3 Denmark – Danmarks Nationalbank - “Danish Government Borrowing and Debt”, 2001 ; Sweeden - Bergstton, P, Holmlund, A. & Lindberg, S., “The SNDO´s Simulation Model for Government Debt Analysis”, mimeo, 2002; Portugal – Matos, P. – “Benchmarking for Public Debt Management: the Case of Portugal”, mimeo, INSEAD, 2001 ; Canada – Bolder, D.J. –”Towards a More Complete Debt Strategy Simulation Framework”, Bank of Canada, 2002; Some other contributions: Barnhill, T. and G. Kopitz –”Assessing fiscal vulnerability under uncertainty”, Risk Journal, 2004; Mendoza, E.G., Oviedo, P.M “Fiscal Solvency and Macroeconomic Uncertainty in Emerging Markets: The Tale of the Tormented Insurer”, 2004; Missale, A., Giavazzi, F. – “Public Debt Management in Brazil”, 2003;

Ministério da FazendaTesouroNacional Benchmark Studies - Brazil Set Steady-state for relevant macroeconomic variables; Test alternative debt compositions (fixed, floating, inflation and fx-linked instruments); Economic evolution: modeling of the main macroeconomic variables: interest, exchange rate and price index; Two alternative approaches: Correlated stochastic process Macro-structural models 4

Ministério da FazendaTesouroNacional Benchmark Studies - Brazil Settle the Composition Calculate several macroeconomic variables for different scenarios Pricing assets Calculate debt cost of carrying Determination of the Debt/GDP relation for each scenario Risk and return of the Debt/GDP relation Hold results (composition and risk/return of the Debt/GDP relation) Correlation matrix calculation Creation of the efficient frontier Performance measure of the National Treasury 5

Ministério da FazendaTesouroNacional Benchmark Studies - Brazil VARIABLES PATH SIMULATION DEBT/GDP SIMULATION 6

Ministério da FazendaTesouroNacional Portfolio selection => the financing efficient frontier (trade-offs well explained by the model) For the determination of the benchmark is necessary to choose the risk aversion of the government (society) The model indicates perfomance measures Efficient criteria based on the efficient frontier Benchmark Studies - Brazil Results 7

Ministério da FazendaTesouroNacional Benchmark Studies - Brazil Macrostructural Model Stochastic Model 8

Ministério da FazendaTesouroNacional S T R A T E G I C P L A N N I N G - T R A N S I T I O N D E B T S T R A T E G Y 9

Ministério da FazendaTesouroNacional The Eight Steps of Strategic Planning 1 - Long Term Objectives; 2 - Macroeconomic Scenarios; 3 – Preliminary Discussions: How Fast Can we Achieve Long Term Objectives 4 - Strategy Design and Preliminary Risk Assessment 5 – Definition of Targets to be Announced; 6 – Analysis of Opportunities for Next Years; 7 - Tactical Debt Planning & Execution (short term); 8 – Annual Borrowing Plan (PAF) Monitoring. 10

Ministério da FazendaTesouroNacional 1 - Long Term Objectives Define the Objective Function; Simulation; Benchmark; 11

Ministério da FazendaTesouroNacional 2 - Macroeconomic Scenarios Scenario Design; Technical Discussions; Market and Proprietary Forecast; Identification of the Most Relevant Risk Factors (Brazilian Macroeconomy, World Macroeconomy, Political Environment, etc); Others. 12

Ministério da FazendaTesouroNacional 2 - Macroeconomic Scenarios bad good Domestic Macroeconomic Perspectives External Macroeconomic Perspectives Internal Politics Perspectives Tridimensional Perspective 13

Ministério da FazendaTesouroNacional 2 - Macroeconomic Scenarios Results: Optimistic Scenario; Neutral Scenario; Pessimistic Scenario; Stress Scenario; 14

Ministério da FazendaTesouroNacional 3 - Preliminary Discussions How fast can we achieve long term objectives, considering the restrictions? Main restrictions: Budget; Demand Issues; Secondary Objectives (desirable maturity profile, etc); Internal Limits for Some Statistics (max. Maturity in one month, etc); Contingent Liabilities. 15

Ministério da FazendaTesouroNacional 4 - Strategy Design and Preliminary Risk Assessment New Strategy module – GERIR system 16

Ministério da FazendaTesouroNacional GERIR system Strategy Design and Preliminary Risk Assessment

Ministério da FazendaTesouroNacional Strategy Design and Preliminary Risk Assessment

Ministério da FazendaTesouroNacional 19 Some Different Ways to Assess Risk Federal Public Debt Maturity Profile( by Index) Cashflow-at-Risk (CfaR) – Federal Public Debt Cost-at-Risk (CfaR) – Federal Public Debt Time Series Risk x Scenario Risk 4 - Strategy Design and Preliminary Risk Assessment

Ministério da FazendaTesouroNacional Stress assessment Strategy Design and Preliminary Risk Assessment

Ministério da FazendaTesouroNacional Integrated management of asset and liabilities (ALM) Integrated management of asset and liabilities of the central government Map of asset and liabilities of the National Treasure and the Central Government (National Treasury + Central Bank) Strategy Design and Preliminary Risk Assessment

Ministério da FazendaTesouroNacional Strategy Design and Preliminary Risk Assessment

Ministério da FazendaTesouroNacional 5 – Definition of Targets: Strategy Results Statistics 23

Ministério da FazendaTesouroNacional 24 5 – Definition of Targets: Intervals Chosen

Ministério da FazendaTesouroNacional Gains in terms of Cashflow Risk Reduction (CfaR); Improvement in Composition and in Debt Maturity Profile; 25 6 – Analysis of Opportunities for Next Years Federal Public Debt - Increased Share of Fixed-Rate Debt Reduces Refinancing Risk Maturities in 2003 (in Dec/02) Maturities in 2004 (in Dec/03)Maturities in 2005 (in Dec/04)

Ministério da FazendaTesouroNacional PAF Published 26

Ministério da FazendaTesouroNacional 7 - Tactical Debt Planning and Execution Focused on the short-term (one month); Demand issues; Cashflow necessity; Coordination with other institutions (Central Bank, Ministry of Planning, etc); 27

Ministério da FazendaTesouroNacional Short term discussions (hypothetical data) Tactical Debt Planning and Execution

Ministério da FazendaTesouroNacional Strict coordination with Central Bank Tactical Debt Planning and Execution

Ministério da FazendaTesouroNacional Quarterly limits; Roll over indicators; Strategy monitoring 30 8 – Annual Borrowing Plan Monitoring

Ministério da FazendaTesouroNacional 8 – Annual Borrowing Plan Monitoring Quarterly limits (hypothetical data); 31

Ministério da FazendaTesouroNacional Strategy monitoring (hypothetical data) ; 32 8 – Annual Borrowing Plan Monitoring

S E P T E M B E R BUILDING A DEBT STRATEGY: THE BRAZILIAN EXPERIENCE Anderson Caputo D. Silva Head of Public Debt Strategic Planning Department Brazilian National Treasury LAC DEBT GROUP: DEBT STRATEGY WORKSHOP Washington, DC, EUA, 2005

Ministério da FazendaTesouroNacional