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

W A S H I N G T O N D C O C T O B E R 2 0 1 0 Non Resident Investors in Brazilian Public Debt Andre Proite Brazilian National Treasury Investor Relations Office- Manager

The importance of Non Resident Investors 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 other hand, a reduction in the external debt. 2

Withholding tax exemption for Non Resident Investors – Feb-06  On Feb-06, the gov ´ t launched a measure that exempted non resident investors from taxes and then converted it in a law afterwards. Foreign Investors: Domestic Debt Participation % 12% IOF tax IOF shift to 4% exemption 10.2% 10% 8% IOF shift to 6% 7.00% Law 11,312/06 6% Tax Exemption 5.65% 2% IOF 4.47% tax on NRI 4% 1.5% IOF tax on NRI 2% 0% 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 3 Source: Until 06/2008 CVM. After, SELIC (Central Bank).

NRI in the domestic market Non-resident share in Overall Federal Public Debt 100% 5.8% 6.6% 11.6% 90% 7.3% 10.1% 23.6% 0.7% 80% 0.5% 70% 60% 50% 87.7% 86.1% 84.2% 40% 75.9% 30% 20% 10% 0% 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 Source: National Treasury 4

Size of the domestic markets for public bonds – BRA -8 th largest Size matters  Sophisticated investors  Liquidity and market depth  Market development USD Billion 1000 2000 3000 4000 5000 6000 7000 8000 0 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 Source: BIS Quarterly Review, December 2008 Finland Malaysia Indonesia Argentina South Africa Norway Ireland Hong Kong 5

6 Brazil has changed its base of investors  The Brazilian debt profile has changed significantly along the years: larger participation of investors with a long term profile. Investors Base – Aug-10 Investors Base – Jan-07 Others, 4.2% Insurance, Others, 2.0% 3.9% Funds, 29.7% Funds, 35.9% Banks, 41.4% Banks, 37.8% Foreign Foreign Investors, 0.9% Investors, 10.1% Pension Funds, Pension Funds, 17.6% 16.6% 6 Source: National Treasury

7 Importance of the non resident investor for the Public Debt Management  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 7

8 Non Resident – share by index (inflation linked and fixed rate) 500 450 32,3 92,4 400  The non resident investor has a preference for 12,4 57,0 2,2 350 11,3 fixed rate bonds, and, to a lesser extent, 300 14,0 R$ Billion inflation linked bonds. 250 6,3 422,8 200 372,3 377,0 371,7 343,8 348,4 150 293,0 229,6 100 50 100% 0,6% 2,9% 3,4% 3,4% 4,9% 7,1% 14,1% 0 90% 19,7% Jan/07 Dec/07 Dec/08 Dec/09 Jan/07 Dec/07 Dec/08 Dec/09 80% Inflation Linked Fixed Rate Domestic Investors Foreing Investors 70% 60%  The participation of non resident investors in 50% 99,4% 105,2% 102,0% 101,5% 102,3% 92,9% 85,9% 40% 80,3% fixed rate bonds has grown strongly, in line 30% with the Treasury strategy to increase the 20% participation of the fixed rate debt and to 10% reduce participation of the floating rate debt. 0% Jan/07 Dec/07 Dec/08 Dec/09 Jan/07 Dec/07 Dec/08 Dec/09 Inflation Linked Fixed Rate Domestic Investors Foreing Investors Note: For Aug-10, NRI share on IP and fixed rate bonds are 4% and 23.6% respectively Source: National Treasury 8

9 The IOF tax policy  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 9

Contact 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 10