Latin Finance - May 2008 - 70

brazilian sovereign borrowing Chasing Long Term Reais by Dan Shirai really like working at the treasury in Brasilia,” Paulo Valle says candidly during a rare moment of repose amid a flurry of investor discussions at IDB annual meetings last month in Miami. When asked if he is eyeing a higher paying private sector job, the deputy secretary of treasury in charge of Brazil’s public debt says he does not think of leaving the government – yet. “We’ve done some really great things,” Valle tells LatinFinance. “And we’re helping institutionalize the treasury so that we won’t rely on one person or another for things to function properly.” The election of Lula in 2002 was preceded by panic selling that threw the market into chaos and dragged sovereign bonds to a level implying a very high probability of default. But as he prepared to take office, it became clear Lula would stick to the previous administration’s economic policies and Brazilian assets embarked on a protracted bull run. Lula’s election coincided with an unprecedented combination of positive developments in global and domestic markets that sparked an investment boom, particularly in Brazil’s debt, involving both local and offshore investors. Brazil – whose C bond was until retirement in 2005 the most liquid EM security – found itself awash with demand for high-yielding securities. The ministry of finance and treasury had to revamp operations to keep up with the flow, and Valle was among the architects of what investors today call a well-run and respected institution. Taking over issuance of international bonds from the central bank was among the more important moves. “When you’re putting together a long term financing plan, it makes sense to have a view that considers both internal and international debt issuance,” says Valle. The transition started in 2004 and “ I Paulo Valle has helped establish an institutional framework at the treasury and strengthened the dialogue with investors. A 30-year in reais may happen this year. Embracing Foreign Flows For foreign investors, the ministry of finance took steps to reduce the bureaucracy involved in setting up a 2689 account, the vehicle through which offshore investors access local instruments. In 2006, a 15% withholding tax on investments in government securities was lifted, opening the floodgates for offshore participation. Investment grade, which would boost the quality of that flow, is also looming. “Foreign participation has been very important to develop the long end,” says Valle. He adds that much of the liquidity in Brazil’s 30-year domestic inflation-linked notes is due to offshore interest. As for a 30-year fixed rate NTN-F type bond, Valle says that may still be a ways off. “Our concern is to avoid creating a 30-year point [on the curve] without much liquidity, or that detracts from the 10-year point,” he says. Brazil first issued its domestic 10-year fixed rate bond, called the NTN-F 2017, last year. The goal, says the secretary, is to create enough liquidity at that point before moving onto a 30-year. The NTN-F 2017 has roughly 15 billion reais outstanding so far, which is close to, but not quite at the optimal point yet, he says. As for a global real-denominated 30year bond, that also appears now to be several months off. With strong currency appreciation, interest in bonds denominated in reais has waned. LF Pushing local currency tenors: Valle was completed in 2005. The creation of three separate departments – a back, middle and front office – each with distinct roles, is a characteristic of today’s treasury that did not exist through the 1990s. In 2003, the treasury also finished building an investor relations office. Among its first clients were domestic pension funds. Until 2003, Brazil’s largest investor base still had a short term investment horizon, with most portfolios holding interest rate-adjusted notes. “We worked together with them to create some specific bonds that would attend to their needs,” says Valle. The result, he says, is the NTN-B, a longdated inflation-linked note which is today one of Brazil’s most popular domestic bonds. UPDATE For more on Brazil sovereign issuance see www.latinfinance.com > 70 LATINFINANCE May 2008

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Latin Finance - May 2008

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