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PART II – COUNTRY CASE STUDIES
116. 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.
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I. BRAZIL
117. 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 Management.”
118. Section A covers a broad array of issues. It starts with a brief discussion on 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.
119. Section B focuses on the guidelines that have been considered in determining optimal
strategies for keeping the cost and risk of the public debt under sustainable levels. Along with
an illustration of the recent behavior of several debt management indicators, this section
describes the implementation of an Asset and Liability Management (ALM) framework and
of 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.
120. 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 in stimulating the demand for long-term
securities.
A. Developing a Sound Governance and Institutional Framework
Debt management objectives and coordination
Objectives
121. In line with the guidelines suggested by the IMF and the World Bank, the basic
directive pursued by the Brazilian government for public debt management is the cost
minimization over the long term, taking into consideration the maintenance of judicious
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The case study was prepared by the Debt Management Unit/Secad III of the Brazilian
National Treasury.
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levels of risks. As a secondary and complementary objective, the Brazilian public debt office
has been taking actions toward the development of its domestic public securities market.
122. 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. Also of significant importance are the government efforts in the
establishment of a solid reputation with creditors, respecting contracts and avoiding an
opportunistic approach in its relationship with the market.
123. As to the risks involved, 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.
124. The gradual replacement of floating-rate securities for fixed-rate securities represents
another major guideline pursued by the Brazilian debt management office. Nevertheless,
while an important measure to reduce market risk, changing the composition of debt toward
greater concentration of fixed-rate instruments has often diverged with the objective of
maintaining refinancing risk under comfortable levels. This dilemma occurs due to 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.
125. Finally, it is worth mentioning that the Brazilian Treasury seeks the development of
the secondary market as a main venue to achieve the previous objectives. Some measures are
already in effect (see Section C), such as:
• improvement of the term structure of interest rates;
• standardization of financial instruments; and
• fungibility for floating-rate securities.
Scope
126. 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 non-marketable debts,
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domestic and foreign currency debts, and contingent liabilities. Given that the Brazilian
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The National Treasury considers, for debt management purposes, the contingent liabilities
which have not yet materialized and for which there is a legal and/or contractual obligation,
(continued…)
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Treasury has adopted an integrated Assets and Liabilities Management framework, asset
characteristics are also taken into account in the conduct of public debt management.
Coordination with monetary and fiscal policies
127. 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.
128. In reference to the 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 in order to measure the potential impact of such strategies on the
conduct of monetary and exchange rate policies.
129. An important step taken in Brazil is that as of May 2002, the central bank is no longer
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allowed by the Fiscal Responsibility Law to issue its own securities. Monetary policy is
now conducted through secondary market operations with Treasury securities, enhancing the
transparency between fiscal and monetary policy.
Transparency and accountability
130. Brazilian debt management authorities seek transparency and accountability by
publicly disclosing the roles and responsibilities for debt management and by providing the
public with information regarding debt management policies and statistics. In addition,
external auditors frequently examine and evaluate the activities related to public debt
management.
Roles and responsibilities for debt management
131. The roles and responsibilities for debt management are clearly and formally defined
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by legal instruments. A summary of legislation is available at the Treasury’s web site.
such as government guarantees on foreign exchange borrowings, government programs,
among others.
21
In anticipation of this measure, the central bank stopped issuing its own securities in
October 2001.
22
www.tesouro.fazenda.gov.br
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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, (i.e.—t he 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
132. Information on debt management policies and operations are publicly disclosed by
means of regular calendar of auctions, and regular report publications, all available on the
Treasury’s web site. Besides publishing its Annual Borrowing Plan, which includes the main
guidelines and strategies to be pursued over the year, the National Treasury Secretariat
provides detailed public debt statistics through two monthly reports: the Federal Government
Domestic Debt Report (in cooperation with the CBB); and the National Treasury Fiscal
Results.
External auditing
133. Debt management activities are audited annually by external auditors. Two entities
are commonly in charge of such attribution: the Secretaria Federal de Controle – SFC
(internal auditing agency – executive branch); and the Tribunal de Contas da União – TCU
(external auditing agency). These agencies are, respectively, affiliated with the Executive and
Legislative branches of the federal government. Although SFC plays an important role by
conducting a preliminary audit of public debt management activities, TCU is held responsible
for ultimately approving them.
134. In addition, there are some reports required by the Parliament related to debt
management activities, among which the following are worth mentioning:
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• Report on Fiscal Management—follow up of debt limits; and
• Account Balance of the Federal Government—a description of all federal expenses
throughout the year, forwarded annually to the Parliament and TCU.
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Debt limits were established by the Fiscal Responsibility Law and are currently being
discussed by Parliament and the Executive Branch. The Treasury Secretary will regularly
report to Parliament on these limits.
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Institutional framework
Governance
135. The National Treasury Secretariat has implemented a new debt management
organizational framework since November 1999, based on the international experience of
Debt Management Office (DMO). The Public Debt Office comprises three main branches:
• The back office, which is in charge of the registry, control, payment and accounting of
both domestic and foreign debts.
• The middle office, which is responsible for the development of medium- and long-term
strategies aiming at reductions on debt cost and risk, macroeconomic follow-up and
investor relations.
• The front office, that is responsible for the design and implementation of short-term
strategies, related to bond issuances in domestic markets. Front office activities
associated with international capital market borrowings are currently handled by the
central bank, but will be transferred to the Treasury in September 2003.
136. The new institutional arrangement resulted in a substantial improvement in debt
management allowing for the standardization of operational controls, the monitoring of risks
and the separation of functions concerning long-term (strategic) and short-term (tactical)
planning. Currently, approximately 90 financial analysts compose the Public Debt Office.
Management of internal operations
137. To strengthen internal operations and in response to an increasing number of non-
integrated data systems—making the process of gathering information cumbersome, time
consuming and highly exposed to operational risk—the Treasury has engaged in a
cooperative program with the World Bank. The program contemplates three modules:
• IT System Development;
• Control, Internal Auditing and Security Standards, Governance and Organizational
Structure; and
• Risk Management.
138. Although the modules mentioned above are interrelated, focus has been given to the
development of the IT System. The project is, therefore, mainly directed to the establishment
of an integrated platform that will enhance the efficiency and reliability of public debt
accounting and reporting, improving the Treasury’s capacity and transparency in the conduct
of public debt management.
139. The new institutional framework, mentioned previously, also represents an important
step toward the reduction of operational risks. Front and back office functions have been
clearly separated, and the middle office has been established to respond to the setting and
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monitoring of risk analysis, independently from the area responsible for executing market
transactions. It is worth mentioning that registry and auction services are presently provided
by the central bank, for which a formal agreement has been recently formulated.
140. The process of hiring personnel was subject to some improvements enacted in the
face of competition among different careers within the Executive branch. Although there is
still some degree of competition with other institutions, both from the private and public
sectors, the Treasury has managed to hire and keep qualified staff by restructuring the career
of Treasury financial analysts, and implementing a strict selection process mostly directed to
professionals with strong backgrounds in economics and finance. Considerable resources
have also been spent in specialized training for the debt management staff, such as a graduate
course in debt management.
141. Another step taken towards the improvement of debt management operation was the
establishment of a Code of Conduct for Public Debt Managers in February 2001, which
contemplates some directives related to their conduct—for example, the prohibition to buy
public bonds—and the creation of an Ethics and Professional Conduct Committee of Public
Debt Managers.
Legal framework relating to borrowing
142. The main legislation regarding to borrowing can be specified, basically, in four
instruments: (i) Brazilian Constitution – limits for public debt; (ii) Fiscal Responsibility Law
(FRL) regulatory framework for fiscal policy; (iii) Budget Guidelines Law; and, (iv) Annual
Budget Law – LOA (the amount borrowed throughout the year cannot exceed the total
established in the specific budgetary sources included in the LOA). Furthermore, a ceiling to
new external debt borrowings is determined by a Senate resolution.
143. Among the legal instruments mentioned above, it is worth mentioning the Fiscal
Responsibility Law, which constitutes a milestone in public finance at all levels of
government. By means of a set of rules, it imposes limits to the government’s payroll
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spending and to the amount of outstanding debt, requiring higher transparency of public
accounts, stricter rules for elected officials of the executive branch at the end of their
mandates, and administrative and penalty sanctions to the administrators who fail to comply
with fiscal legislation.
144. The FRL reinforced the “golden rule” established in Article 167-III of the Brazilian
Federal Constitution, which states that it is forbidden to carry out credit transactions that
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These limits are based on the relation between the debt outstanding and Net Current
Revenue.
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exceed the amount of capital expenses. It also imposes restrictions to credit operations among
government entities, including the National Treasury and the CBB and establishes that the
CBB, as of May 2002, would no longer be allowed to issue its own securities in the primary
market.
B. Establishing a Capacity to Assess and Manage Cost and Risk
Debt management strategy
145. Brazilian debt management strategy follows guidelines that are initially prepared by
the Public Debt Office, and submitted for the approval of the Secretary of the National
Treasury and the Minister of Finance.
146. The Treasury has been gradually moving towards an Asset and Liability Management
(ALM) framework. In this context, the risks inherent in the current debt structure are
evaluated taking into account the characteristics of assets, tax revenues and other cash flows
available to servicing the debt. Net exposures in the balance sheet of the central government
are identified by selecting financial assets and liabilities, including guarantees, counter-
guarantees and contingent liabilities.
147. Results of such analysis under an ALM framework suggest that in the Brazilian case
(as usual in most countries) debt managers should seek a debt composition with heavier
reliance on fixed-rate and inflation-indexed instruments. The main mismatches between
assets and liabilities of the Brazilian central government, as of December 2001, are presented
in Figure 1.
148. Note that the main mismatches concern those related to interest and exchange rate
exposures. Although there are several difficulties to achieve in the short and medium term a
debt portfolio that matches the characteristics of assets, debt management officials find this
type of ALM analysis extremely valuable in setting long-term strategies for reaching optimal
debt composition.
149. Along with the objective of gradual minimization of the interest and exchange rate
exposures, the Brazilian government, in line with IMF and World Bank guidelines, has
established among its priorities the reduction of refinancing risk. These objectives, however,
are often conflicting, given the still limited demand for long-term fixed-rate, and
inflation-indexed securities. Meanwhile, the National Treasury and the central bank have
concentrated efforts in developing secondary markets and in stimulating operations with
long-term fixed-rate, and inflation-indexed instruments. These measures have proved to be
helpful in paving the way to a more appropriate composition of the public debt in the future.
150. Cash management represents another important aspect of the debt management
strategy currently adopted by the Brazilian government. The Treasury has been keeping
enough cash reserves to allow greater flexibility in the pursuit of its financing strategies and,
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most important, to reduce the risk of rolling over the debt under temporarily unfavorable
conditions.
Figure 1. Assets and Liabilities Imbalances, December 2001
(In billions of reais)
Equities
Price Index
Exchange rate
Floating rate
Fixed rate
Net Liability Others Net Asset
-400 -300 -200 -100 0 100 200
151. The debt management guidelines, which emphasize the reduction in refinancing risk
and follow an ALM framework, have already reached good results. With the intent of
illustrating the main achievements of such strategy, and keeping in mind the still long way to
attaining a more appropriate debt structure, the recent behavior of several debt management
indicators and some of the lessons learned by Brazilian debt management officials over the
past years are presented below.
Lengthening of debt average maturity in order to reduce refinancing risk
152. The average term of the outstanding domestic securities debt reached 35 months in
December 2001, from 27 months in December 1999. Behind such achievement are the efforts
to extend the maturity of securities issued through auctions, which represent approximately
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70 percent of the domestic debt. Figure 2 reports the outstanding increase in the average
maturity of these securities, growing from 4.6 months in July 1994 to approximately
29 months in December 2001. This rise is linked to the objective of reducing refinancing risk
and can be mainly explained by long-term issues of floating-rate (LFT) and inflation-indexed
bonds (NTN-C).
Improving the redemption profile
153. A remarkable advance regarding Treasury’s financing policy refers to the percentage
of public securities maturing in 12 months, which was reduced from 53 percent in
December 1999 to 26 percent in December 2001, as reported in Figure 3.
Figure 2. Average Maturity–Auction Issued Debt
National Treasury
(In months)
40
30
20
10
0
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Besides issuing securities through auctions, the Brazilian Treasury is sometimes required
by Law to issue debt directly to specific creditors, mainly as a result of debt securitization.
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