BRAZIL : Latest Developments in Public Debt Management Fabio de Oliveira Barbosa Secretary of the National Treasury XIV Seminar on Regional Fiscal Policy - ECLAC Santiago de Chile, January 2002

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

Fiscal policy: Primary targets met for 13 consecutive quarters ... Source: Central Bank of Brazil

... together with a much better distribution of the fiscal effort. 32.872 13.734 Source: Central Bank of Brazil

The increase of net public sector debt reflected not only the fiscal policy and the domestic and international economic environment in the last 8 years... Total Central Government States and Municipalities State-owned enterprises * November

... but also decisive actions towards fiscal transparency, 9,2 8,3 Source: Central Bank

Domestic debt dynamics: growth components ... and the implementation of key government programs, several of them associated with the consolidation of the fiscal regime. Domestic debt dynamics: growth components States and Municipalities R$ 329,4 billion R$ 626,9 billion Debt Management (cushion) R$ 44,8 billion Exchange Rate R$ 74,4 billion Public Programs R$ 44,8 billion R$ 60,7 billion Contingent Liabilities R$ 87,6 billion Nominal Interest R$ 118,2 billion Primary Surplus R$ 75,1 billion Source: National Treasury and Central Bank Includes remunerating factors. Privatization and Primary Surplus: basic interest rate (SELIC rate) Privatization R$ 58,2 billion

HOWEVER, along with the recorded growth in public debt, its funding structure has improved remarkably... Brazil´s 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

Guidelines : International Capital Markets ... together with the successful sovereign presence in the most relevant capital markets in the world. Guidelines : International Capital Markets Brazil: Predictable, regular but moderate borrower; Consolidation of 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.

The results have been impressive The results have been impressive... BRAZIL: Federal Government Domestic Debt

... as showed by the sharp reduction of the refinancing risk. - Improved debt profile - Gradual increase of the average life - Focus on short term maturities (up to 12 months) - Prudent cash management 34,97 25,59

A very comfortable debt profile was achieved... Federal Government Debt Maturity Profile: 2002/03

... and a significant reduction of the average funding cost has been observed. Federal Government Domestic Debt:Average Funding Cost 18,98

The somewhat volatile macroeconomic environment has prevented further progress also towards debt duration... 56.58 7.82 6.99

Assets and Liabilities Imbalances - R$ billion ... which now could be sought, given the prudent refinancing risk level embedded in domestic debt structure. Assets and Liabilities Imbalances - R$ billion December, 2001

Annual Borrowing Plan: 2002 - Continued focus on refinancing risk: # Average maturity # Limit for short term debt - Gradual duration increase; - Further development of the domestic yield curve; - Smoothening of debt maturity profile (buyback operations); - Debt instruments standardization: proactive stance.

Strategy for 2002 Comparative Analysis

BRAZIL : Latest Developments in Public Debt Management Fabio de Oliveira Barbosa Secretary of the National Treasury XIV Seminar on Regional Fiscal Policy - ECLAC Santiago de Chile, January 2002