20180126-法国巴黎银行-Brazil__A_drop_in_non-residents__participation_13页_345kb

Summary of the Latin America Strategy Report: Brazil

Core Content

This report provides an analysis of Brazil's public debt dynamics, focusing on the composition, maturity schedule, and cost of debt in 2017 and 2018. It is prepared by Banco BNP Paribas Brasil S.A. and outlines the key trends and strategic implications for the Brazilian government's borrowing plan and market behavior.

Key Information

• Non-residents' Participation in Brazilian Debt
  Non-residents' share of Brazilian local public debt decreased to BRL 416bn (~USD 126bn) as of December 2017.
  This represents 12.1% of the total debt, or 33% of Brazil's international reserves (currently at USD 382bn).
  Foreign outflows amounted to BRL 10.8bn (~USD 3.3bn) in December 2017.
  Financial institutions and insurance companies were the main acquirers of local debt in December 2017.

• Debt Maturity Structure
  The average maturity of the total debt is 4.3 years, with 16.9% of the debt maturing in the next 12 months.
  This level is considered low and manageable, supporting debt dynamics and nominal fiscal results.
  The majority of the maturing debt is fixed rate bonds, which make up 58% of the maturing debt.

• Debt Cost Projections
  The cost of rolling over the debt is projected to fall to 9.38% in December 2018, a decrease of 96 basis points from the current level of 10.34%.
  This decline is attributed to the easing monetary cycle initiated in October 2016 and the convergence of inflation and credit risk premiums to lower levels.
  The trend is expected to continue as inflation expectations remain downward.

• 2018 Annual Borrowing Plan
  The National Treasury (BNT) has maintained all debt metrics within the original 2017 borrowing plan limits.
  It has increased the share of LFTs (Local Fixed Term bonds) in the short term.
  The BNT has also adjusted the 2018 limits for floating rate and inflation-linked bonds:

  • Floating rate securities: 31–35% (up from 29–33%)
  • Inflation-linked bonds: 27–31% (down from 29–33%)

• Auctions Calendar for 2018
  The 2018 auctions calendar includes the following:

  • H1 2018:
    • LTN (short and medium-term bonds): October 2018, April 2019, April 2020, January 2022
    • NTN-F (fixed rate long-term bonds): January 2025, January 2029
    • NTN-B (inflation-linked bonds): August 2023, August 2028
    • LFT (floating rate bonds): March 2024, September 2024
  • H2 2018:
    • LTN: April 2019, October 2019, October 2020, July 2022
    • NTN-F: January 2025, January 2029
    • NTN-B: May 2035, May 2055
    • LFT: September 2024
  • The frequency of NTN-F auctions was reduced from 15 days to 7 days in 2018, providing more flexibility in issuing fixed-rate securities.
  • The Treasury will no longer conduct quarterly repurchase auctions for NTN-F and NTN-B, allowing for more discretionary management of these instruments.

Main Points

• The reduction in non-residents' participation in local debt is a positive trend, indicating improved domestic demand and potentially lower reliance on foreign capital.
• The maturity structure of the debt is relatively balanced, with the BNT in a comfortable position to roll over the debt.
• The cost of domestic debt is expected to decline, which is beneficial for fiscal sustainability and public finances.
• The BNT is gradually shifting the composition of debt toward fixed-rate and inflation-linked instruments, aligning with long-term strategy goals.
• The change in the issuance calendar and auction frequency reflects a more flexible and market-responsive approach to public debt management.

Strategic Implications

• The increased share of LFTs and the shift toward fixed-rate and inflation-linked instruments may help stabilize the debt profile and reduce exposure to interest rate fluctuations.
• The reduction in the gap between NTN-F auctions is a strategic move to enhance liquidity and flexibility in the fixed-rate bond market.
• The decision to stop quarterly repurchase auctions for NTN-F and NTN-B suggests a more adaptable approach to managing these instruments, which could reduce speculative volatility.

Definitions and Metrics

• Federal Public Debt (FPD): Covers 96.5% of the total public debt.

• General Government Gross Debt (GGGD): Includes FPD, state and municipal debt, and BCB repo facilities.

• Public Sector Net Debt (PSND): Deducts public sector assets from GGGD, with the main components being:

  • International reserves (18.6% of GDP)
  • Loans to official financial institutions (7.1% of GDP)
  • Other assets (8.1% of GDP)

• The difference between GGGD and PSND is influenced by the accumulation of international reserves and the management of repo facilities by the central bank.

Contacts

• Gabriel Gersztein – Head of FX & IR Latam Strategy, +55 11 3841 3421, gabriel.gersztein@br.bnpparibas.com
• Gustavo Mendonca – FX & IR Latam Strategy, +55 11 3841 3445, gustavo.mendonca@br.bnpparibas.com
• Samuel Castro – FX & IR Latam Strategist, +55 11 3841 3492, samuel.castro@br.bnpparibas.com

Legal Disclaimer

• This document is a marketing communication and not investment research.
• It may contain research as defined under MiFID II, which is intended for certain firms and individuals.
• No liability is accepted for any reliance on the information contained in this document.
• All information is subject to change and should not be used as a basis for investment decisions.
• The document may include hypothetical or back-tested performance data, which is not indicative of future results.
• BNPP may have a financial interest in the securities or related derivatives discussed.
• The document does not constitute a prospectus or public offering.

Conclusion

The report highlights a stable and manageable debt structure in Brazil, with a strategic shift toward fixed-rate and inflation-linked instruments. The reduction in non-residents' participation and the flexibility in the issuance calendar suggest a more resilient and domestically focused public debt management approach, which supports fiscal sustainability and nominal outcomes.