Non Resident Investors in Brazilian Public Debt Andre Proite - - PowerPoint PPT Presentation

Non Resident Investors in Brazilian Public Debt

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Andre Proite Brazilian National Treasury Investor Relations Office- Manager

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Overview

• Since the 90s, the domestic market for public bonds have grown substantially in the emerging

economies.

• Growth led by :
• Favorable international environment until the middle of 2008
• Great liquidity
• Better macroeconomic fundamentals, in general
• Change in technology –real time trades, instant data streamers
• Concern on excess of volatility
• Brazil experienced the same, with an increase in the stock of the domestic public debt and, on the
• ther hand, a reduction in the external debt.

The importance of Non Resident Investors

4.47% 7.00% 5.65% 10.2% 0% 2% 4% 6% 8% 10% 12% Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10

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• On Feb-06, the gov´t launched a measure that exempted non resident investors from taxes and then

converted it in a law afterwards.

Withholding tax exemption for Non Resident Investors – Feb-06

Foreign Investors: Domestic Debt Participation %

Source: Until 06/2008 CVM. After, SELIC (Central Bank).

Law 11,312/06 Tax Exemption 1.5% IOF tax on NRI IOF shift to 4% IOF shift to 6% IOF tax exemption 2% IOF tax on NRI

75.9% 87.7% 86.1% 84.2% 0.5% 0.7% 7.3% 10.1% 23.6% 11.6% 6.6% 5.8% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Aug-10 Domestic Debt held by Residents Domestic Debt - held by Non Residents External debt

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Non-resident share in Overall Federal Public Debt

Source: National Treasury

NRI in the domestic market

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Size of the domestic markets for public bonds –BRA -8th largest

1000 2000 3000 4000 5000 6000 7000 8000

Japan United States Italy France Germany China United Kingdom Brazil Canada Spain South Korea Belgium India Netherlands Greece Mexico Turkey Poland Czech Republic Portugal Sweden Australia Switzerland Austria Thailand Denmark Singapore Finland Malaysia Indonesia Argentina South Africa Norway Ireland Hong Kong

USD Billion

Source: BIS Quarterly Review, December 2008

• Market development
• Liquidity and market depth
• Sophisticated investors

Size matters

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Brazil has changed its base of investors

Source: National Treasury

• The Brazilian debt profile has changed significantly along the years: larger participation of

investors with a long term profile.

Funds, 29.7% Foreign Investors, 10.1% Pension Funds, 16.6% Banks, 37.8% Insurance, 3.9% Others, 2.0%

Investors Base –Aug-10 Investors Base –Jan-07

Funds, 35.9% Foreign Investors, 0.9% Pension Funds, 17.6% Banks, 41.4% Others, 4.2%

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• The non resident investor has a distinct profile. Among its features, we find:
• Demand for fixed rate bonds;
• Longer term portfolio;
• More appetite for duration.
• The two first features contribute, respectively, for the following objectives of the

Brazilian public debt management:

• Increase of the fixed rate share;
• Lengthening of the maturity profile of the debt

Importance of the non resident investor for the Public Debt Management

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Non Resident – share by index (inflation linked and fixed rate)

Note: For Aug-10, NRI share on IP and fixed rate bonds are 4% and 23.6% respectively

• The participation of non resident investors in

fixed rate bonds has grown strongly, in line with the Treasury strategy to increase the participation of the fixed rate debt and to reduce participation of the floating rate debt.

• The non resident investor has a preference for

fixed rate bonds, and, to a lesser extent, inflation linked bonds.

229,6 293,0 343,8 371,7 372,3 422,8 348,4 377,0 6,3 14,0 11,3 12,4 2,2 32,3 57,0 92,4 50 100 150 200 250 300 350 400 450 500 Jan/07 Dec/07 Dec/08 Dec/09 Jan/07 Dec/07 Dec/08 Dec/09 Inflation Linked Fixed Rate R$ Billion Domestic Investors Foreing Investors 105,2% 102,3% 102,0% 101,5% 99,4% 92,9% 85,9% 80,3% 2,9% 4,9% 3,4% 3,4% 0,6% 7,1% 14,1% 19,7% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Jan/07 Dec/07 Dec/08 Dec/09 Jan/07 Dec/07 Dec/08 Dec/09 Inflation Linked Fixed Rate Domestic Investors Foreing Investors

Source: National Treasury

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• It´s a regulatory tax:
• Has been changed a number of times since the tax exemption;
• Negatively affects the benchmark investment indexes overseas;
• The world is going through a extraordinary period
• Search for high yields
• Successful stories
• Dangers of overshooted FX-rate

The IOF tax policy

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Investor Relations Office brazildebt@fazenda.gov.br

Staff: Andre Proite –Manager Flavia Barbosa –Deputy Manager Beatriz Garcia- Trainee David Athayde Juliana Diniz Mathias Lenz Sofia Hauschild - Trainee

http://www.tesouro.fazenda.gov.br/english/index.asp

Contact

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