Brazil

Pages34-48

This part of the document contains the 18 country case studies prepared by government debt managers. Each case study focuses on the steps taken by the country to improve public debt management practices in recent years and their connection with the Guidelines for Public Debt Management.

Page 34

The Brazilian government has been implementing several measures to improve the conduct of public debt management. This document provides an overview of the main guidelines currently followed by Brazilian public debt officials, drawing comparisons to those proposed by the IMF and the World Bank in their joint report, Guidelines for Public Debt Management1.

The first section, "Developing a Sound Governance and Institutional Framework," covers a broad array of issues. It starts with a brief discussion of the objectives and scope of public debt management in Brazil and its coordination with monetary and fiscal policies. Following is a description of the main measures to enhance transparency and accountability by means of well-defined roles and attributions for debt management, comprehensive information disclosure, and frequent examination of debt management activities by external auditors. Concluding the section, the most relevant events regarding governance and the management of internal operations, including recent institutional reforms, are presented.

The second section, "Establishing a Capacity to Assess and Manage Cost and Risk," focuses on the guidelines that have been considered in determining optimal strategies for keeping the cost and risk of the public debt at sustainable levels. Along with an illustration of the recent behavior of several debt management indicators, this section describes the implementation of an ALM framework and strategies envisaging reductions in refinancing and market risks. The main features of the risk management models currently in place and under development are also described.

The third and concluding section covers the actions that have been taken for developing the markets for government securities. Emphasis is given to the description of some noteworthy measures released by the Brazilian Treasury and central bank in November 1999 and to the continuous effort to stimulate the demand for long-term securities.

Developing a Sound Governance and Institutional Framework
Debt management objectives and coordination
Objectives

In line with the guidelines suggested by the IMF and the World Bank, the basic directive pursued by the Page 35 Brazilian government for public debt management is cost minimization over the long term, taking into consideration the maintenance of judicious levels of risks. As a secondary and complementary objective, the Brazilian Debt Management Unit has been taking actions toward the development of its domestic public securities market.

Although debt management officers strive to implement strategies aiming at cost minimization of the Brazilian government debt, special attention is given to the risks embodied in each strategy. Government efforts in the establishment of a solid reputation with creditors, respecting contracts, and avoiding an opportunistic approach in its relationship with the market are also of importance.

Emphasis has been given to the monitoring of refinancing and market risks, most specifically the former. In this respect, the Brazilian Treasury, as reported in greater detail below, has successfully extended the average maturity of the debt and achieved a smoother redemption profile. Close attention is paid to the amount of debt maturing in the short term (12 months), reducing the treasury's exposure to undesirable events that may occur.

The gradual replacement of floating-rate securities for fixed-rate securities represents another major guideline pursued by the Brazilian debt management office. Nevertheless, although it is an important measure to reduce market risk, changing the composition of debt toward greater concentration of fixed-rate instruments has often diverged from the objective of maintaining refinancing risk at comfortable levels. This dilemma occurs as a result of the still limited demand for long-term fixed-rate bonds. As the demand for these securities becomes more pronounced and macroeconomic policies are kept sound and stable, a more aggressive strategy in favor of those securities will follow.

Finally, the Brazilian Treasury seeks the development of the secondary market as a main venue to achieve these objectives. Some measures are already in effect (see the third section, "Developing the Markets for Government Securities"), such as

- improvement of the term structure of interest rates,

- standardization of financial instruments, and

- fungibility for floating-rate securities.

Scope

The scope of Brazilian public debt management is also in line with the IMF and World Bank guidelines. It encompasses the main financial obligations over which the central government exercises control, which include both marketable and nonmarketable debts, domestic and foreign currency debts, and contingent liabilities.2 Given that the Brazilian Treasury has adopted an integrated ALM framework, asset characteristics are also taken into account in the conduct of public debt management.

Coordination with monetary and fiscal policies

Relative to the coordination with fiscal policy, borrowing programs are based on fiscal projections established by the federal budget and approved by parliament. The treasury also elaborates and publishes a detailed Annual Borrowing Plan that is submitted to the revision and approval of the minister of finance.

In the coordination with monetary policy, there is close interaction between treasury and central bank officials. Regular meetings with members of both institutions are held, and information on the government's current and future liquidity needs is shared. Moreover, although the final decisions regarding public debt financing strategies are under the responsibility of the national treasury, officials from the Central Bank of Brazil (CBB) are always consulted in advance to measure the potential impact of such strategies on the conduct of monetary and exchange rate policies.

An important step taken in Brazil is that as of May 2002, the CBB is no longer allowed by the Fiscal Responsibility Law (FRL) to issue its own securities.3 Monetary policy is now conducted through secondary market operations with treasury securities, enhancing the transparency between fiscal and monetary policy. Page 36

Transparency and accountability

Brazilian debt management authorities seek transparency and accountability by publicly disclosing the Page 37 roles and responsibilities for debt management and providing the public with information regarding debt management policies and statistics. In addition, external auditors frequently examine and evaluate the activities of public debt management.

Roles and responsibilities for debt management

The roles and responsibilities for debt management are clearly and formally defined by legal instruments. A summary of legislation is available at the treasury's web site.4 Foreign and domestic public debt management is handled by the ministry of finance and, in turn, within the ministry of finance by the National Treasury Secretariat (that is, the Public Debt Office). Similarly, all regulations related to debt management are disclosed, including those on the activities of primary and secondary markets, and on clearing and settlement arrangements for trade in government securities.

Public availability of information

Information on debt management policies and operations is publicly disclosed by means of a regular calendar of auctions and regular report publications, all...

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