Márcio G. P. Garcia

DEBT MANAGEMENT IN BRAZIL: EVALUATION OF THE REAL PLAN AND CHALLENGES AHEAD

Co-autor:  
Afonso Bevilaqua

Journal of International Finance and Economics  

(Jan. 2002; Volume 7 - #1 - pgs. 15-35)

January, 2002

Executive Summary
During the 1995 to 1998 period, the net public debt of the consolidated public sector in Brazil increased from 28.5 percent to 42.6 percent of GDP. This dramatic growth has raised many doubts about the sustainability of the current economic policy in the country.

These concerns have been further increased by the exchange rate devaluation of January of 1999, which raised even more the stock of the domestic public debt--due to the existence of dollar-linked indexation clauses on part of the debt--, as well as the stock (in R$) of the foreign debt. The concerns about sustainability have been compounded by those related to the very short maturity of the domestic public debt, which increased the vulnerability of the country In this paper we assess the experience with public debt management in Brazil in recent years, attempting to evaluate its main lessons and derive policy guidelines for the next few years, with emphasis on the issues pertaining to the structure of the debt (denomination, indexation and maturity). We review in Section II the genesis of the modern domestic public debt market in Brazil. After being conceived in the second-half of the sixties as non-inflationary way of public finance, and based initially fully on inflation-linked bonds, the public debt market expanded substantially in its first years, generating for a while a seemingly costless way to fund public expenditures. During the 1980s, with the rise in inflation, the cash management activities became predominant in the debt market. Since then, the maturity of the public debt has been remarkably small. With inflation stabilization, the debt has been gradually lengthened while nominal bonds became more prevalent, even when total debt was growing fast due to fiscal deficits. The international financial crises since 1997 changed that trend in the debt structure. As of October, 1999, the share of nominal bonds is only 11.55%, while the average remaining life of the debt is still very short.

Section III decomposes the large growth observed in the federal bonded debt during 1995-1998, searching for its macroeconomic causes. It attempts to quantify the contraction and expansion sources of the rapid increase in the stock of federal bonded debt occurred during the period. The main culprits are the weak fiscal stance and the very high interest rates payments. In Section IV we perform simulation exercises of the public net debt path until 2002, the final year of the current presidential term. We show that even under favorable macroeconomic conditions the evolution of the public net debt to GDP ratio will remain a policy concern in coming years. Policy Conclusions are summarized in Section V, where we discuss the role of public debt management in Brazil in the near future. Our main policy advice is that the rollover of the domestic public debt should be made with inflation-indexed bonds, in order to lengthen the maturity without creating time consistency problems. We add a few suggestions on how this shift could be accomplished.