A SUMMARY OF RECENT DEVELOPMENTS AND ACHIEVEMENTS IN BRAZILIAN DEBT MANAGEMENT

A SUMMARY OF RECENT DEVELOPMENTS AND ACHIEVEMENTS IN BRAZILIAN DEBT MANAGEMENT Public Debt Strategic Planning Department COGEP The year f 2003 has been a favrable year fr reaching significant develpments in debt management practices. Plicy decisins taken by the new gvernment twards a strng fiscal stance and strict cntrl ver inflatinary pressures have prvided a sund envirnment giving way t a new scenari f increasing stability and substantial imprvements in debt management practices. This dcument summarizes the main develpments and achievements in Brazilian debt management in 2003. The bjective is t shw n a cnslidated basis the measures that have been taken t fster the develpment f Brazilian debt markets aiming at enhancing liquidity, reducing csts, imprving the debt prfile and diversifying the investrs base. The text is rganized as fllws. Sectin ne presents an verview f sme selected impacts f the sundness f the new gvernment ecnmic plicy. Emphasis is given t the gains btained due t macrecnmic imprvements. The secnd sectin describes the strategic measures taken by the Treasury twards the develpment f debt markets. Sectin three lists sme imprvements in debt indicatrs, while the last sectin presents sme cncluding remarks. 1. Impacts f the sundness f the new gvernment ecnmic plicy: Significant reductin in the Brazilian risk premium (EMBI Brazil was 2.443 bps in September 2002 and reached 601 bps in Octber 2003) graph I; Enhanced credibility allwed fr the resumptin f issuance in the internatinal markets: Glbal 2007, Glbal 2011, Glbal 2013, Glbal 2024-B, and Glbal 2010 all with cllective actin clauses CACs. Net issuance ttaling US$ 4.6 billlin; Significant reductin in inflatinary expectatins with a direct impact n futures market rates (graph II), creating better cnditins fr the reductin in newly- issued debt premium. Lwer flating-rate discunts were respnsible fr a reductin in refinancing csts f arund R$ 595 millin, while fr fixed-rate bnds such reductins reached R$ 1.1 billin, since the beginning f 2003; 1

Cnstant reductin in the Selic rate and appreciatin f the exchange-rate was als translated int finance gains fr the public debt. Psitive results were btained bth in the stck and cash flws. The ttal gain btained since the beginning f 2003 is f apprximately R$ 110 billin (see Table I). Regarding the Selic rate, the gains btained since June, when this rate started t decrease, indicate that at the end f 2003 the results in the debt stck and cash flw will be psitive; The impact f the Real appreciatin allwed a financial gain f arund R$ 12 billin in the debt cash flw. In additin, there was a significant reductin f R$ 65 billin in the debt stck (R$ 48 billin in the external debt and R$ 17 billin in the dmestic debt); Regarding the dllar/selic swap peratins, the financial gain is f apprximately R$ 31 billin. Even thugh these peratins d nt impact directly the federal public debt, the gain is reflected in the Central Gvernment result (Natinal Treasury + Central Bank) and cnsequently in the Net Public Sectr Debt; Finally, the ttal impact f the imprvement in the macrecnmic indicatrs, frm January t Octber 2003, cmpared t the expectatins at the end f 2002, was arund R$ 54 billin fr the external public debt and R$ 25 billin fr the dmestic public debt. Cnsidering the indirect impact f dllar/selic swap peratins in the Central Gvernment accunts and in the Net Public Sectr Debt, the ttal gain is even higher (arund R$ 110 billin). TABLE I R$1000 Dmestic Debt Reductin in the Cst at Issuance - Impact n Selic Debt 594.619,01 Reductin in the Cst at Issuance - Impact n Fixed-Rate Debt 1.117.916,63 Selic Cash Flw (12.644,34) Selic Stck (320.219,30) Exchange-rate Cash Flw 6.045.073,23 Exchange-rate stck 17.336.791,24 Ttal Impact f Dmestic Debt 24.761.536,47 External Debt Exchange-rate Cash Flw 5.937.999,94 Exchange-rate Stck 47.809.916,87 Ttal Impact f External Debt 53.747.916,81 Dllar/Selic Swap Swap Cash Flw 9.671.873,62 Swap Stck 21.508.884,33 Ttal Impact f Dllar/Selic Swap 31.180.757,95 Ttal Impact 109.690.211,23 Surce: Mnthly Reprt/Octber 2003 Risk Management/ Public Debt Strategic Planning Department/Natinal Treasury 2

2. Imprvements in debt management strategic measures & develpment f debt market 2.1. Strategic Measures - Supply Side Gd macrecnmic fundamentals have allwed the Natinal Treasury t adpt strategic measures that aim t imprve public debt prfile and develp public securities market. The fllwing items describe sme implemented measures. Creatin f benchmarks Fixed-Rate Bnds - cncentratin f issues thrugh repenings t stimulate liquidity. Mrever, t enhance demand and liquidity fr these bnds they have been placed s that their maturity dates cincide with maturity dates f future market cntracts; Flating Rate Bnds cncentratin f issues at lnger maturities and in different mnths frm thse established fr fixed-rate bnds; Cntrl f refinancing risk Cnduct f exchange auctins (every Friday) f shrt term fr lng term securities graph III; Building up f cash reserves Since the beginning f 2003, the Natinal Treasury has been issuing mre than its financing needs (current psitin equivalent t mre than 3 mnths f future payments); Implementatin f a new dealers system. It nw includes tw grups: Primary dealers aimed at primary ffers and mney market peratins, with up t 12 institutins; Specialists - aimed at utright peratins in the secndary market, with up t 10 institutins. The intrductin f this grup created incentives fr deepening the transactins in the secndary market. A new set f bligatins and benefits that dealers have t cmply with has enhanced the efficiency f the new dealers system cmpared t the previus ne; Supprt fr imprved trading envirnment - launching f a clearing mechanism and f an electrnic trading platfrm fr public debt securities t be implemented by the Futures Exchange (BM&F) in the first mnths f 2004, which will play an imprtant rle in imprving efficiency and helping the develpment f the secndary market; 3

Intrductin f a buyback prgram f inflatin-linked lng term securities decisin taken after discussins with lng term investrs. This measure is aimed at reducing transactin csts f lng term investrs due t the still limited liquidity f such bnds. By creating the pssibility f reducing eventual csts that investrs are expsed t when adjusting t their cash flw needs, the Treasury is at the same time stimulating the demand fr these lng term securities and helping in the develpment f a mre liquid secndary market. As market develps this kind f prgram will n lnger be necessary; 2.2 Strategic Measures- Demand Side Histrical backgrund has shwn that supply side measures while imprtant are nt enugh t achieve, n a sustainable basis, all the bjectives f public debt management. Structural imprvements in debt prfile need t be accmpanied by the develpment f debt markets, reducing the risk f abrupt changes in the Treasury refinancing plicies in mments f market vlatility. T this extent, diversifying the investrs base plays a majr rle. Debt hldings are still cncentrated with few types f investrs (mstly banks and mutual funds) graph IV. The measures listed belw represent sme f the main actins that the Treasury has been pursuing t deal with this limiting factr n the demand side. Intrductin f a prgram envisaging a clser relatinship with pensin funds, which are natural investrs f lng-term instruments. After several meetings between Treasury fficials and pensin funds managers, a set f pssible measures t stimulate investment in lng-term securities was raised, in line with ALM bjectives f pensin funds and debt management gals. Frm these discussins, a prgram f NTN-B issuance - priceindex (IPCA) securities - was successfully implemented in September 2003, with excellent perspectives fr 2004 and beynd. Treasury Direct the prgram f bnd sales thrugh the Internet was enhanced with the launching f an advertising campaign as frm September 2003. Its impact has been extremely psitive: the sales increased 84.4% in September cmpared t August, while the number f registered investrs in the prgram increased 23.0% in the same mnth, as bserved in the fllwing table II (see graph V in Annex); 4

Table II Mnth Mnthly Sales Registered Investrs (R$) (Per Mnth) Jan/2002 4,644,684.87 2,390 Feb/2002 7,725,164.04 610 Mar/2002 5,875,562.73 353 Apr/2002 4,341,606.17 218 May/2002 3,118,590.94 217 Jun/2002 2,389,846.14 223 Jul/2002 3,738,220.63 429 Aug/2002 5,198,533.13 129 Sep/2002 6,173,725.22 192 Oct/2002 10,935,406.94 254 Nv/2002 9,801,661.16 282 Dec/2002 12,141,017.47 323 Jan/2003 17,352,987.10 399 Feb/2003 11,828,570.46 569 Mar/2003 11,406,446.83 440 Apr/2003 26,114,990.11 1,295 May/2003 20,195,794.90 1,458 Jun/2003 20,154,920.46 1,102 Jul/2003 17,327,478.53 1,109 Aug/2003 18,200,769.55 1,259 Sep/2003 33,562,344.17 3,040 TOTAL 252,228,321.55 16,291.00 Implementatin f the investment accunt. This accunt intends t exempt investment turnver f Financial Transfer Cntributin CPMF with the bjectives f: (i) ffer similar treatment fr the investment industry as the ne given t exclusive investment funds, which are exempt f CPMF; and (ii) increase the cmpetitin in the investment fund industry and the trading vlume in the secndary market. 3. Imprvements in Debt Indicatrs As a cnsequence f the imprvements in the macrecnmic envirnment and the adptin f debt management measures, debt indicatrs presented significant psitive results. Gradual increase in the maturity f newly-issued bnds graphs VI (LFT flating-rate); VII (LTN fixed-rate lngest maturity is July 2005); VIII (NTN-C inflatin-linked), as well as reductin f the discunt rates required by the market graphs IX and X. The resumptin f the lengthening prcess significantly decreased the percentage f debt maturing in 12 mnths (frm 40.2% in January 2003 t 32.1% in Octber 2003) graph XI; Significant increase in the participatin f fixed-rate instruments frm nly 1.9% in January 2003 t 9.9% in Octber. The amunt issued mnthly f these securities has nw becme the mst representative acrss the different instruments used by the Treasury t refinance its debt graphs XII and XIII; 5

Lwer expsure t exchange rate risk. Cnsidering the share f dllarlinked securities in the ttal dmestic debt, the decrease was frm 22.4% in December 2002 t 11.4% in Octber 2003, while including swap peratins the share f exchange-rate expsure significantly decreased frm 37.0% t 24.7% in the same perid graphs XIV, XV and XVI; The vlume f gvernment securities traded in the secndary market rse significantly in 2003 (apprximately 71.2%, frm R$ 5.2 billin in January t R$ 8.9 billin in Octber), with future cntracts f interbank depsits (DI) als increasing frm 578 thusand in January t 1.4 millin in Octber 2003 (increase f 134%). These figures are t a great extent a cnsequence f gd macrecnmic fundamentals cupled with the afrementined measures taken by the Treasury t enhance liquidity in the public debt securities market. Final Remarks The Brazilian Treasury has clearly stated its debt management bjectives fcusing n minimizing the cst f the debt under prudent risk levels. Given the current debt prfile, this calls, especially, fr reducing the debt maturing in the shrt term and reaching a better debt cmpsitin with lwer expsure t adverse shcks in interest and/r exchange rates. Nevertheless, it is widely acknwledged that precnditins t effective debt management practices are a sund macrecnmic envirnment and a develped debt market. Previus experience in Brazil has shwn that the lack f a develped market can severely affect the refinancing strategy adpted by the Treasury in the event f market turbulence. Strict and transparent measures n bth the fiscal and mnetary plicy frnts helped t reestablish a favrable envirnment fr Treasury debt managers t cnduct a set f actins t develp the debt market. These actins encmpass nt nly key changes in the way debt management strategy is being cnducted but als measures t fster liquidity and the diversificatin f the investrs base. This text shws that substantial gains have already been achieved with excellent perspectives fr the next years. Fr further infrmatin, please access Brazilian Natinal Treasury site: www.tesur.fazenda.gv.br Or cntact Institutinal Relatins Area: stndivida@fazenda.gv.br. 6

ANNEX Graph I Graph II 37,0% 35,5% 34,0% 32,5% 31,0% 29,5% 28,0% 26,5% 25,0% 23,5% 22,0% 20,5% 19,0% 17,5% 16,0% 12/30/02 03/06/03 04/02/03 05/05/03 06/03/03 07/07/03 09/01/03 10/06/03 11/03/03 11/17/03 Yield Curve - Dmestic Interest Rates Jan/03 Feb/03 Mar/03 Apr/03 May/03 Jun/03 Jul/03 Aug/03 Sep/03 Oct/03 Nv/03 Dec/03 Jan/04 Feb/04 Mar/04 Apr/04 May/04 jun/04 Jul/04 Aug/04 Sep/04 Oct/04 Nv/04 Dec/04 Jan/05 Feb/05 Mar/05 Apr/05 May/05 Jun/05 Jul/05 7

Graph III 40.000 35.000 Redemptin Redemptin Repurchase/Exchange ( R$ millin) 30.000 28.756 27.336 25.256 23.997 24.315 25.000 22.718 20.000 18.266 15.654 16.221 15.000 14.093 11.215 11.001 10.000 8.351 7.089 7.221 6.208 4.760 5.326 5.000 3.529 1.683 553 1 - Dec/2002 Jan/2003 Feb/2003 Mar/2003 Apr/2003 May/2003 Jun/2003 Jul/2003 Aug/2003 Sep/2003 Oct/2003 Graph IV Federal Public Debt Hlders 50% 45% 40% 35% 30% 38% 38% 42% 39% 43% 42% 43% 35% 36% 33% 35% 34% 25% 21% 20% 16% 15% 15% 15% 10% 10% 9% 8% 9% 8% 7% 7% 5% 5% 5% 3% 2% 1% 1% 1% 0% Dec/99 Dec/00 Dec/01 Dec/02 Sep/03 Oct/03 Financial Investment Fund Treasury Bnds used fr ther purpses Nn Financial Legal Entity Others 8

Graph V 250.000 200.000 Stck - Treasury Direct 215.969 150.000 100.000 50.000-4.650 Jan/2002 Feb/2002 Mar/2002 Apr/2002 May/2002 Jun/2002 Jul/2002 Aug/2002 Sep/2002 Oct/2002 Nv/2002 Dec/2002 Jan/2003 Feb/2003 Mar/2003 Apr/2003 R$ thusand May/2003 Jun/2003 Jul/2003 Aug/2003 Sep/2003 Oct/2003 Graph VI 20,0 18,0 Flating-Rate Securities Maturity 6 mnths 12 mnths 18 mnths 24 mnths 30 mnths 36 mnths 48 mnths 16,0 14,0 R$ Billins 12,0 10,0 8,0 6,0 4,0 2,0-01/2003 02/2003 03/2003 04/2003 05/2003 06/2003 07/2003 08/2003 09/2003 10/2003 9

Graph VII 12 Average Maturity - at Issuance (Fixed-Rate Securities) 11,41 11,96 11 10,45 10,61 10 9,21 9,56 in mnths 9 8 7,23 8,70 7 6,63 6 5 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Graph VIII 10

Graph IX 1,4% LFT AUCTION S DISCOUNTS - Dec/02 t ct/03 1,2% 1,0% Rate (p.y) 0,8% 0,6% 0,4% 12/03/02 02/04/03 03/06/03 04/01/03 05/06/03 06/10/03 0,2% 07/01/03 08/19/03 09/02/03 10/07/03 10/21/03 10/28/03 0,0% - 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 Average Maturity (in mnths) Graph X 28,0% ACCEPTED RATE IN LTN AUCTIONS (FIXED RATE) 28,03% 26,81% 26,0% 24,0% 25,25% 25,94% 24,08% 25,10% 24,64% 23,83% 23,00% Rate (p.y) 22,0% 22,60% 21,65% 21,74% 20,0% 10/01/03 01/07/04 04/01/04 21,23% 18,0% 01/07/04 01/10/04 04/01/05 07/01/05 18,07% 17,97% 17,68% 17,72% 16,0% 03/06 03/21 04/05 04/20 05/05 05/20 06/04 06/19 07/04 07/19 08/03 08/18 09/02 09/17 10/02 10/17 11/01 11

Graph XI 60,00% % Maturing in 12 mnths - Dmestic Federal Debt 55,00% 50,00% 45,00% 40,00% 35,00% 30,00% 25,00% 20,00% Dec/99 Mar/00 Jun/00 Sep/00 Dec/00 mar/01 Jun/01 Sep/01 Dec/01 Mar/00 Jun/02 Sep/02 Dec/02 Mar/03 Jun/03 Sep/03 Graph XII Public Offer: Fixed-Rate x Flating-Rate Securities 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Flating-Rate Securities Fixed-Rate Securities 12

Graph XIII Share f Fixed - Rate Securities in Dmestic Debt 12 10 8 % 6 4 2 0 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Graph XIV Dmestic Debt + Swap 76 US$ billin 73 70 67 64 61 jan-02 Feb/2002 Mar/2002 Apr/2002 May/2002 Jun/2002 Jul/2002 Aug/2002 Sep/2002 Oct/2002 Nv/2002 Dec/2002 Jan/2003 Feb/2003 Mar/2003 Apr/2003 May/2003 Jun/2003 Jul/2003 Aug/2003 Sep/2003 Oct/2003 13

Graph XV Dmestic Public Debt Cmpsititin - Octber 2003 11% 2% 10% 13% 64% Fixed-Rate Flating-Rate Price-Index Exchange-Rate Others Graph XVI Dmestic Public Debt Cmpsititin - per expsure/cnsidering swap peratins as exchange-rate risk - Octber 2003 24% 2% 10% 13% 51% Fixed-Rate Flating-Rate Price-Index Exchange-Rate Others 14