Brazil is surfing a wave of international cheer. In July, it re-opened the long-end of the global bond market for emerging market issuers with a trail-blazing issue. In October it sold a $1.25bn 2041 bond with the lowest yield in its long-dated debt portfolio. It’s like the credit crunch never happened. In an exclusive interview, Paulo Valle, head of public debt operations at Brazil’s National Treasury tells EuroWeek about his local and global debt strategies.
In recent years, Brazil has entered international capital markets to fund amortizations on foreign bonds. Do you foresee the country ever accessing dollar bond markets specifically for balance-of-payments support?
The National Treasury’s strategy on the external market is to qualitatively improve its profile, to consolidate the external yield curve by cultivating efficient benchmark bonds and providing liquidity to investors in the secondary market.
There is a huge difference between the External Federal Public Debt (EFPD) and the balance-of-payments flows. The total annual local and global new issuance by September 2009 was around R5bn and, in the same period, the balance of payments registered a $29.1bn surplus, around R52bn.
This shows that even if the Treasury doubled its issuance, it would have little impact on the balance of payments.
We will continue to enhance the efficiency of the external yield curve through opportune security buyback operations, such as the so-called high coupon bonds, coupled with maintenance of the benchmarks (normally 10 and 30 years) for selected maturities.
Will Brazil consider selling global bonds denominated in yen or euros — or is the premium relative to dollar bonds prohibitively expensive?
Brazil is always looking for alternative market funding that is interesting from a cost-perspective. Our main concern is to have the best combination of maturity and costs while ensuring that investor preferences are also matched. But in all circumstances costs in other currencies are compared to the dollar market levels, which represent our main external funding nowadays.
Brazil is one of the few emerging market sovereigns with a globally issued local currency bond. Will you consider further issuance in this format?
The economic crisis closed the market for local currency global bonds but in 2009, there has been some recovery in this market. It represents an alternative for international investors to have bonds in reais, even if they are not allowed to bring their money to the Brazilian domestic market.
We believe there will be strong investor interest for these bonds due to the fundamentally solid Brazilian economy and the attractive ratings trajectory. Investors would gain access to a stable currency and the bonds would help them diversify their portfolio.
What about foreign investor demand for inflation-linked domestic government bonds?
The Brazilian market has become very attractive, especially after showing a strong resilience in the international crisis. A Chinese sovereign wealth fund already invests in the Brazilian public bond market and has looked for further details on the Brazilian market to base their investment strategy.
It is no secret that the inflation-linked bonds in the local market is on investor minds, not only because its size but also by its structure and deepness. Brazil is in the top five emerging markets for the asset class and is well represented in the Barclays Capital EM Government Inflation-Linked Bond Index (GILB) and the JP Morgan Government Bond Index-Emerging Markets GBI-EM (GBI-EM).
How did your issuance strategy in the domestic market change in the global crisis and what’s in store for 2010?
The National Treasury establishes every year upper and lower limits for the Federal Public Debt indicators, such as total debt outstanding and the composition of this debt in terms of fixed rate and floating rate bonds. However in 2008, the National Treasury reduced outstanding debt from a range of R1,480bn-R1,540bn to a range of R1,360bn-R1,420bn. We also changed the composition of fixed rate and floating rate bonds, from 35%-40% and 25%-30%, to a range of 29%-32% and 31%-34%, respectively.
We reduced the outstanding debt and increased the proportion of floating rate bonds to avoid higher financial costs for the National Treasury. In moments of volatility, the market tends to raise the premiums for fixed rate bonds due to concerns about future price direction. We also established buy-and-sell auctions of long-term fixed rate bonds in order to provide price references for investors during distressed market conditions.
We will maintain our goal of increasing the average maturity of the debt. We will also seek to increase the number of fixed rate and inflation-linked bonds.
Can you rule out further taxes on foreign capital inflows into domestic government bond markets?
The reintroduction of the tax on foreign-exchange inflows was aimed at reducing the flows of short term speculative investments that were generating excess volatility in the exchange rate. The government is still evaluating the effect of the tax as it started in October 20 so it is too soon to talk about any further measures.