Controlling Subnational Debt in Brazil

Transcription

1 Debt Management: Building Resilience through a Coordinated Policy Agenda and Enhanced Institutions Berlin, May 2-3, 2013 Controlling Subnational Debt in Brazil Renato Villela Secretary of Finance State of Rio de Janeiro

2 Background Late 80s and early 90s: New Federal Constitution of 1988 => disorganized fiscal decentralization process: more revenues for the municipalities; unbalanced tax and expenditure assignemts; tax sharing system frozen in time The Central Government moved out of some sectors (such as public transportation) within one year, not giving time to SNGs to assume responsibility in a orderly fashion. SNGs did not manage to benefit from the price stability after 1994: Increased their wage bill, on average, by 35% in a period of very low inflation Did not renegociated with contractors, which embedded in their prices very high expected inflation. Uncontrolled use of state banks as a source of financing AS A RESULT: FISCAL DISORDER AT THE SUBNATIONAL LEVEL

3 Real Ex-post Interest Rate Annually (%) When inflation stopped in 1995, governments in Brazil faced huge fiscal deficits, particularly at state level, where creating new taxes is not easy and transfers are limited Inflation 1976/ CPI* Monthly (%) Plano Bresser Plano Cruzado Plano Verão Plano Collor I Plano Collor II Plano Real % Real Interest Rate (Selic x IPC Fipe) Real Interest Rate (Selic x IGP-DI) Primary Balance by Government Level % of GDP % Pré-fixação da correção monetária e câmbio Aug-76 Aug-77 Aug-78 Aug-79 Aug-80 Aug-81 Aug-82 Aug-83 Aug-84 Aug-85 Aug-86 Aug-87 Aug-88 Aug-89 Aug-90 Aug-91 Aug-92 Aug-93 Aug-94 Aug-95 Aug-96 Aug-97 Aug-98 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 * Consumer Price Index - IPC (FIPE) Source: Central Bank 3 Source: Central Bank

4 Continuous Growth of Subnational Debt and Constant Bail-outs Law 7614 (The states did not even pay back the Central government the service related to this bail out before they got another one) Law 7976 refinancing for 20 years, 5-years grace period Law refinancing for 20 years + 10, debt service cap of 11% of the Net Real Revenue (RLR) 1997 Law refinancing of the state bonds and other non-refinanced debt, 30 years + 10 years to pay eventual residual, realinterest rate of 6%, 7.5% or 9% depending on down-payment of 20%, 10% or none, debt service cap of 13% of the RLR, must agree on fiscal pact.

5 Refinancing under 9496 Law associated with a Fiscal Pact For the first time the debt refinancing was contingent on a Fiscal Adjustment Program (PAF) that will remain in force as long as the debt is outstanding. These pacts are part of the renegociation contracts. Based on Fiscal Targets (redefined annually) Debt to Revenue Ratio Primary Result Revenue Performance Personnel to Revenue Ratio Investment to Revenue Ratio Privatizations/Institutional Improvement

6 The reorganization of sub-national finances has contributed to economic stability in Brazil States entered in a pact with the federal government, renegotiating their debts and adopting fiscal programs Debt service is guaranteed by contract and the ability of the federal government to seize state revenues The fiscal responsibility law of 2001 forbids the federal government to renegotiate state debts Consistent application of the law and contracts since 1997 has proved highly beneficial to all parties PRIMARY SURPLUS TARGET AND ACTUAL (% OF GDP) 37% 6

7 Fiscal discipline allowed state debt/revenue ratios to improve since ,00 2,50 2,00 1,50 1,00 0,50 Total SP RJ MG RS AL CE Ag 2008 T otal* 1,19 SP* 1,63 RJ 1,54 MG 1,66 RS* 2,4 AL 1,93 0,00 dez/00 dez/01 dez/02 dez/03 dez/04 dez/05 dez/06 dez/07 CE 0,16 * April

8 Subnational Debt is regulated by several legal constrains Federal Constitution (Art.52) states that it is responsibility of the Federal Senate to define global limits and conditions for Union s external debt Subnationals domestic and external debt Senate Resolution 43 defines the following limits for SNGs Limits on flows» Annual amount of new credit < 18% Net Current Revenue (NCR)» Annual debt service < 13% NCR Limit on stock: Net Consolidated Debt < 200% NCR (states) <130% NCR (munis)

9 Subnational Debt is regulated by several legal constrains (cont d) Limits on the supply of domestic credit to the public sector (National Monetary Council) Global limit: maximum amount of outstanding loans with public entities. Recently being increasingly relaxed. Individual limit by financial institution operatingin Brazil: must keep exposure to public entities up to 45% of its Net Worth.

10 Subnational Debt is regulated by several legal constrains (cont d) Fiscal Responsibility Law, May 2000 LIMITE DE ENDIVIDAMENTO DOS ESTADOS (Proposto pela União) D/RLR 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0, Anos As long as ratio is above 2,00, there are stringent limits on new debt National Treasury will have to agree on any new credit operation States will have NO access to private capital markets 10

11 Subnational Debt is constrained by several objectives and criteria Fiscal Responsibility Law LRF (LC 101) and Limits imposed by the Senate (Res 43) (long term and structural limits) Limits from the Monetary Council CMN (macroeconomic goals) Annual Program- PAF with the National Treasury (consolidated fiscal targets) 11

12 Subnational Debt is constrained by several mechanisms and ratios FRL & Senate Observance of maximum service and debt ratios to be able to contract new debt CMN Rationing of total credit to the public sector (excp. for multilaterals) Prudential limit by bank (45% of capital) PAF Declining Debt Trajectory Multiyear limit for new operations 12

13 New developments and recent issues

14 Debt Indexation by IGP and interest rates Debt indexed to IGP-DI rather than the official inflation index IPCA IGP is computed using asked prices, rather than actual prices Both in good times and bad times, IGP tends to grow more than the IPCA Implicit real rate (6% or penalty 9%) is getting higher than funding cost of federal government Evolution of IGP-DI and Inflation in General IGP-DI IPCA Real Interest Rate on IGP indexed bonds* 14% These issues have stimulated states to think about refinancing their debt with the market Refinancing is more attractive to those that do not benefit from the 13% of RLR cap on debt service (% p.y.) 13% 12% 11% 10% 9% 8% 7% Sep % Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun % Sep-05

15 Accumulation of residuals for 2030 The 13% of RLR cap is a good countercyclical feature Residuals may be too big by 2030 to be repaid in 10 years only Residuals could disappear if GDP growth averages 4% in , and IGP-DI converges to inflation Debt Service State of Rio de Janeiro R$ MM Due - Accrued 2,853 3,169 Paid 13% RLR cap 2,400 2,570 Residual Speed of Amortization Even states with low debt/revenue ratios may have a strong repayment schedule limiting their ability to invest These states are natural candidates for new financing Ceará was already benefiting from several years of fiscal adjustment in 2003, its debt declined steadly over the last years. The state has recently payedoff all its 9496 debt. 15

16 In the wake of the Tax Reform that is being currently pushed by the Union in Congress, many Federative issues have emerged. Debt renegotiation is one Indexation Real interest rate (Selic currently 7.5%) Reduction of the revenue capis also a strong demand Concerns of what is going to come out of the Congress

17 THANK YOU