M A Y 2 0 0 8 W A S H I N G T O N D C GEMLOC PANEL DISCUSSIONS Paulo Valle Brazilian National Treasury
Background - Tax System 2005: Regressive withholding taxes as a function of time. Tax incentives to hold longer term securities: 22.5% up to 6 months; 20% from 6 months to 1 year; 17.5% from 1 to 2 years; 15% if higher then 2 years. 2006 As of Feb-06, foreign investors were exempted from withholding taxes (15%). 2007 Extension of 0.38% CPMF (financial transaction tax) was not approved by the Legislative. 2008 As of Mar-08, the 1.5% IOF (regulatory tax) was introduced to fixed income investments for foreign investors. 1
Background - Improvements in Debt Management Practices Creation of Benchmarks: Fixed-rate securities: Maturities defined in a way to coincide with dates of maturity of contracts in the derivative market. Issuance of notes (NTN-F) with 3, 5 and 10 years maturity. Inflation-linked securities: Longer maturities concentrated in different months from those established for fixedrate securities. Issuance of notes (NTN-B) with 3, 5,10, 20, 30 and 40 years maturity. Repurchase Auctions: Fixed-rate securities: Repurchase of short term securities to reduce refinancing risk. Inflation-linked: Repurchase of long term securities to reduce liquidity risk; Exchange Auctions: Exchange of short term for longer term LFT (floating rate); Exchange of floating-rate and other indexed securities for inflation-linked instruments. Spread Auctions: give parameters during periods of volatility. 2
Background - Dealers System (National Treasury and Central Bank) Primary dealers: 10 institutions focusing on primary auctions and money-market operations. Specialist dealers: 8 institutions focusing on the secondary market. Duties and benefits of the dealers Duties: Have meaningful participation on primary auctions, secondary market and open market operations; Supply the National Treasury and the Central Bank desks with relevant information from bond market and open market operations. Benefits: Right to bid on competitive auctions exclusive for dealers; Right to bid on non-competitive auctions exclusive for dealers; Securities lending; Open market operations (Repo). New rules for specialist dealers: Incentives for providing bid-ask spreads in specific intervals at market opening and close in electronic trading systems. 3
Background - Custody, Depositary and Settlement 80 s until mid-90 s: high inflationary process. Privatization, internationalization and consolidation of banking system. Know-how of inflationary times permitted the creation of one of the most sophisticated settlement systems of the world. SPB Brazilian Settlement System SELIC local custodian for federal government securities BOVESPA - local stock exchange BM&F local commodities and future markets exchange CETIP local custodian for corporate securities CBLC local custodian for stocks Transparency Identification of securities owners IOSCO parameter avoid laundry money Market Size matters Brazil represents about 11% of world s total market cap in domestic inflation linked bonds (Barclay s GIBL index) Brazil represents about 13% of EM market cap in domestic fixed rate bonds (GBI Broad index) 4
Challenges to increase foreign investments I Reduction of Red Tape Need to choose a local representative for custody, brokerage and FX management, and register at CVM and Brazilian IRS (24 hours). Bank makes application with necessary documents CVM checks and, upon approval, sends to Internal Revenue Service (IRS) Automated (electronic) procedure at IRS provides registration II Tax System The 1.5% IOF tax on incoming FX transactions related to investments in the local fixed income market aimed at discouraging short-term capital. The measure aimed at recovering part of the tax loss due to the end of CPMF; III - Liquity. 5
Fixed Rate Bonds: on-shore and off-shore Outstanding and yields (as of -08) 14.69 14.63 14.55 49.2 14.13 13.93 13.79 13.61 14.5 34.1 13.5 18.5 11.98 126 15.6 11.74 12.5 11.5 10.5 % p.y. 8.7 2.3 7.6 3.5 3.1 3.4 9.5 Jan-10 Jul-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-16 Jan-17 Jan-22 Jan-28 8.5 Source: ANDIMA and Bloomberg Outstanding R$ bn NTN-F's Yield BRL's Yield 6
Inflation Linked Bonds Outstanding and yields (as of -08) 7.92 23.5 8.30 8.36 8.38 35.6 31.2 8.15 29.6 7.93 7.42 25.9 7.35 25.1 6.91 6.80 6.75 25.4 8 7 6 15.3 11.5 15.6 12.8 5 4 3 % p.y. 2 2009 Nov 2009 Aug 2010 2011 Aug 2012 2013 2015 2017 Aug 2024 2035 2045 1 Outstanding R$ bn Source: ANDIMA Note 1: The may/09, aug/10, may/11 and may/15 NTN-B are not issued anymore. Note 2: There are NTN-Bs with other maturities. Yield 7