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BRAZIL: RECENT CHANGES IN MONETARY AND FISCAL POLICIES

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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 Treasury – PowerPoint PPT presentation

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Title: BRAZIL: RECENT CHANGES IN MONETARY AND FISCAL POLICIES


1
BRAZIL RECENT CHANGES IN MONETARY AND FISCAL
POLICIES
MINISTRY OF FINANCE National Treasury Secretariat

Fabio de Oliveira Barbosa Secretary of the
National Treasury Treasury Management in Latin
America EuroFinance Conferences Miami, April
2002
2
Brazil Recent Changes in Monetary and Fiscal
Policies
1. Macroeconomic Framework 2. Debt Management
Domestic Capital Market Development 3. The New
Brazilian Payments System 4. Outlook
3
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

4
Macroeconomic Framework
July, 1994 Exchange rate as the nominal anchor
targeting monetary aggregates. January, 1999
Inflation targeting framework floating exchange
rate regime.
5
GDP Growth 1990 - 2002
GDP Per Head
GDP Growth Rate
estimate
6
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
Brazil A New Fiscal Regime
Primary targets met for 13 consecutive quarters...
GDP
In 1998 the target referred only to the Central
Government (0,55GDP) and it was also met
8
... together with much better distribution of
the fiscal effort.
surplus
deficit
Source Central Bank
9
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
February
10
... but also decisive actions towards fiscal
transparency,
9,2
8,3
Source Central Bank
11
Structural Reforms The Fundamentals of a New
Fiscal Regime
  • PRIVATIZATION USD 100 billion in the last decade
  • Public debt amortization
  • Elimination of potential deficits
    (capitalization, subsidies)
  • Important role in FDI flows
  • Productivity and efficiency gains
  • New players in domestic capital markets.

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
Structural Reforms The Fundamentals of a New
Fiscal Regime
  • State Municipalities Refinancing Agreements
    closing of traditional 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 gt 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).

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

15
Macroeconomic Framework
  • In 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.

16
Brazil Recent Changes in Monetary and Fiscal
Policies
1. Macroeconomic Framework 2. Debt Management
Domestic Capital Market Development 3. The New
Brazilian Payments System 4. Outlook
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
  • 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
  • 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
Recent Developments Domestic Debt
Great variety and flexibility to deal with
distinct macroeconomic environments
55.22
28.70
8,57
7,50
22
Effective Steps Towards Capital Market Development
  • ENHANCING TRANSPARENCY
  • . Disclosure of the Treasurys Annual Borrowing
    Plan
  • . Monthly 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
Effective Steps Towards Capital Market
Development (contd)
  • 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.

24
Effective Steps Towards Capital Market
Development (contd)
  • 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.

25
Effective Steps Towards Capital Market
Development
  • Consolidation of the Financial System
  • PROER, PROES, Federal Institutions (BB, CEF, BNB,
    BASA)
  • Successful Public Offerings PETROBRAS, 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)
  • CVM (Brazilian SEC) Formal legal and operational
    autonomy.

26
Brazil Recent Changes in Monetary and Fiscal
Policies
1. Macroeconomic Framework 2. Debt Management
Domestic Capital Market Development 3. The New
Brazilian Payments System 4. Outlook
27
The New Brazilian Payment System
  • 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
  • Reduce systemic risk Central Bank no longer
    bearing the risk
  • Increase settlement efficiency
  • Enhance secondary market liquidity for debt
    instruments
  • Incentive to more competitive financial services
    and
  • Potential increase of domestic credit supply.

28
Main Advantages of the New Brazilian Payment
System
  • Expected Results
  • Private Risk within Private Sector
  • Financial System Further Strengthening
  • Cost reduction for financial transactions
  • Lower Credit Risk
  • Development of new products/electronic transfers

29
Brazil Recent Changes in Monetary and Fiscal
Policies
1. Macroeconomic Framework 2. Debt Management
Domestic Capital Market Development 3. The New
Brazilian Payments System 4. Outlook
30
OUTLOOK
  • More favorable international scenario is
    prevailing
  • Stronger than anticipated US economys
    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
  • BRAZILEconomic Indicators (Average Market
    Expectations)
  • 2002 2003
  • as of early April, 2002

32
OUTLOOK
  • 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
  • Sustain current public debt rollover risk
  • Average maturity around 3yr Short term
    below 29 of total debt.
  • Further duration increase 15 months by year
    end
  • Banco do Brasil New Market Public offering in
    2002.

33
BRAZIL RECENT CHANGES IN MONETARY AND FISCAL
POLICIES
MINISTRY OF FINANCE National Treasury Secretariat

Fabio de Oliveira Barbosa Secretary of the
National Treasury Treasury Management in Latin
America EuroFinance Conferences Miami, April
2002
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