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

2. 1. Macroeconomic Framework 2. Debt Management & Domestic Capital Market Development 3. The New Brazilian Payments System 4. Outlook 1. Macroeconomic Framework 2. Debt Management & Domestic Capital Market Development 3. The New Brazilian Payments System 4. Outlook Brazil: Recent Changes in Monetary and Fiscal Policies

3. Brazil: Macroeconomic Framework Brazil: Macroeconomic Framework 4The Real : 8 consecutive years of stable economic environment, in spite of several international crises (Mexico, Asia, Russia, Argentina) 4 4Remarkable 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) 4 4Inflation Targeting Framework: building a strong track record 4 4A 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

4. July, 1994: Exchange rate as the nominal anchor; targeting monetary aggregates. January, 1999: Inflation targeting framework; floating exchange rate regime. July, 1994: Exchange rate as the nominal anchor; targeting monetary aggregates. January, 1999: Inflation targeting framework; floating exchange rate regime. Macroeconomic Framework

5. GDP Growth: 1990 - 2002* GDP Per Head GDP Growth Rate * estimate

6. Current Account vs. Foreign Direct Investment 1994/2001 ( US$ Billion) Current Account vs. Foreign Direct Investment 1994/2001 ( US$ Billion) Despite the adverse international scenario, FDI flows have remained strong, virtually financing a sharply reduced Current Account Deficit.

7. In 1998 the target referred only to the Central Government (0,55%GDP) and it was also met % GDP Primary targets met for 13 consecutive quarters... Brazil: A New Fiscal Regime

8. surplus deficit Source: Central Bank... together with much better distribution of the fiscal effort.

9. Total States and Municipalities State-owned enterprises Central Government * February 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...

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

11. –PRIVATIZATION: USD 100 billion in the last decade u u Public debt amortization; u u Elimination of potential deficits (capitalization, subsidies); u u Important role in FDI flows; u u Productivity and efficiency gains; u u New players in domestic capital markets. Structural Reforms: The Fundamentals of a New Fiscal Regime Structural Reforms: The Fundamentals of a New Fiscal Regime

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: u u Debt Service Ceiling = 13% of Net Current Revenue (NCR); u u Debt Stock Ceiling equivalent to 100% of NCR; u u Fiscal Programs, annually revised : Targets for primary surplus, payroll, total debt; u u Multi-annual Debt/NCR targets; no “new money” while Debt/NCR > 1; u u Implementation of Privatization Programs: 30% total results; u u State Banks: privatization, closing, transformation into development agencies (BANERJ, BEMGE, CREDIREAL, BANESPA); u u Incentives to the establishment of balanced pension funds (RJ, PE, PR). Structural Reforms: The Fundamentals of a New Fiscal Regime

14. Structural Reforms: The Fundamentals of a New Fiscal Regime Fiscal Responsibility Law 4Art.35: No more refinancing between different levels of government; 4Budget Guidelines Law (LDO): 3-year targets for fiscal policy; 4Allows for expenditure cuts in other branches of government; 4Debt ceilings for the three levels of government 4No budget commitment without effective funding; 4Transparency: reports on fiscal management, budget execution, relationship between the Treasury and the Central Bank.

15. 4In 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. Macroeconomic Framework

16. 1. Macroeconomic Framework 2. Debt Management & Domestic Capital Market Development 3. The New Brazilian Payments System 4. Outlook 1. Macroeconomic Framework 2. Debt Management & Domestic Capital Market Development 3. The New Brazilian Payments System 4. Outlook Brazil: Recent Changes in Monetary and Fiscal Policies

17. BRAZIL: Debt Management & Domestic Capital Market Development 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 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. Brazil: Debt Management Strategy External Debt 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.

20. Recent Developments: Domestic Debt REDUCING REFINANCING RISK - improved debt profile - gradual increase of the average life - focus on short term maturities (up to 12 months) - cash management

21. 55.22 28.70 8,57 7,50 Great variety and flexibility to deal with distinct macroeconomic environments Recent Developments: Domestic Debt

22. Effective Steps Towards Capital Market Development ENHANCING TRANSPARENCY:. Disclosure of the Treasury´s Annual Borrowing Plan. M onthly 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. Effective Steps Towards Capital Market Development (cont´d) (cont´d)

24. (cont´d) (cont´d) TREASURY DIRECT PROGRAM: Main objectives: 4 4Direct access to Treasuries through the Internet; reduced minimum investment; 4 4Incentive to long term saving; 4 4Spread information about public debt; 4 4Features: - Brazil is one of the few countries in the world where this option is available; - Settlement through financial institutions; - Pricing: according to market rates. 4 4Main 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. Effective Steps Towards Capital Market Development 4 4Consolidation of the Financial System –PROER, PROES, Federal Institutions (BB, CEF, BNB, BASA) 4PETROBRAS, CVRD 4Successful Public Offerings: PETROBRAS, CVRD –Development of a vast investors base in domestic markets (over 700 thousand investors bought CVRD shares); 4 4New Market: Tag Along, US GAAP, Ordinary shares. 4 4New Corporate Law: Shareholders rights enhanced; 4Direct incentives towards good governance (CVM, BNDES) 4CVM (Brazilian SEC): Formal legal and operational autonomy.

26. 1. Macroeconomic Framework 2. Debt Management & Domestic Capital Market Development 3. The New Brazilian Payments System 4. Outlook 1. Macroeconomic Framework 2. Debt Management & Domestic Capital Market Development 3. The New Brazilian Payments System 4. Outlook Brazil: Recent Changes in Monetary and Fiscal Policies

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: uReduce systemic risk; Central Bank no longer bearing the risk; uIncrease settlement efficiency; uEnhance secondary market liquidity for debt instruments; uIncentive to more competitive financial services; and uPotential increase of domestic credit supply. The New Brazilian Payment System

28. –Expected Results: uPrivate Risk within Private Sector; uFinancial System: Further Strengthening; uCost reduction for financial transactions; uLower Credit Risk; uDevelopment of new products/electronic transfers; Main Advantages of the New Brazilian Payment System

29. 1. Macroeconomic Framework 2. Debt Management & Domestic Capital Market Development 3. The New Brazilian Payments System 4. Outlook 1. Macroeconomic Framework 2. Debt Management & Domestic Capital Market Development 3. The New Brazilian Payments System 4. Outlook Brazil: Recent Changes in Monetary and Fiscal Policies

30. OUTLOOK 4More 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) 20022003 –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 4 4 Sustain current public debt rollover risk: # Average maturity around 3yr; # Short term below 29% of total debt. 4 4 Further duration increase : 15 months by year end; 4 4Banco do Brasil: New Market; Public offering in 2002. OUTLOOK

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