91694 the world bank Brazil’s Public Services Get Welcome Boost from Better Debt Management IBRD Results Synopsis Confronted by a large debt burden at the end of the 1990s, Brazil teamed with the IBRD and other finan- cial specialists to craft a new approach to debt management that has not only yielded billions of dollars in savings in debt service payments, it also set a new foundation for economic strength that helped insulate Brazil from the severity of the global financial crisis. The savings that resulted from the IBRD- supported reforms are being used to broaden and increase the quality of public services across Brazil. Challenge overlapping—responsibilities. There was a lack of integra- tion and they sometimes pursued incompatible objectives. Lack of reliable information systems, and weak technical, In the latter half of the 1990s Brazil’s debt had grown to institutional and governance capacity also contributed to about US$600 billion or 48 percent of gross domestic prod- exacerbate the already difficult debt management policies. uct (GDP) from US$450 billion (40 percent of GDP) in the early nineties. A large part of this increase resulted from a Given the absence of available debt management models cumbersome debt composition that translated exchange rate in Latin America, and many other countries, the Brazilian devaluations and interest rate shocks into higher indebted- government with the support of the International Bank for ness, amounting to 6.4 percent of GDP in the nineties. Reconstruction and Development (IBRD) set out to cre- ate a world class debt management framework. IBRD and The challenge was to improve the quality of the govern- Brazilian treasury officials worked with a consortium of pri- ment’s debt management as a way to reduce macroeco- vate sector consultants to achieve this goal. The subsequent nomic vulnerabilities, especially those stemming from the success of this initiative has translated into literally billions administration of government assets and liabilities. En- of dollars in savings, which the government is using to im- hanced debt management also needed to complement the prove the lives of all Brazilians. fiscal reforms adopted by the Brazilian government at the beginning of the 2000s. To reduce the risks stemming from Brazil’s high and unwieldy debt mix, the government sought Results to introduce technical, technological and institutional im- provements in its debt management approach. Brazil’s economic picture has since brightened markedly, and improvements in debt management played a significant Much of the problem was institutional. At the end of the part. A fall in financing costs for Brazil, as much as 3 percent nineties, Brazil operated an ad hoc debt management frame- of GDP, produced savings that are being applied to improv- work, with the Central Bank and the National Treasury ing Brazilian public services. Naturally it is difficult to mea- Secretariat (STN) performing different—and in some cases sure the degree to which improved debt management—and March 2010 2 Brazil’s Public Services Get Welcome Boost from Better Debt Management the IBRD’s part in its overhaul in recent years—has contrib- ing granted by Standard & Poor’s, Fitch, and - in 2009 - by uted to Brazil’s stronger economic performance, but there Moody’s Investors Service. The three rating agencies cited has been a clear and significant fall in the country’s financ- Brazil’s prudent debt management policies as one of the ing costs: decisive reasons for the upgrade from speculative-grade rat- ings to investment grade. Naturally, the most important ef- ÔÔ Domestic interest rates paid on government bonds fell fect of this achievement is the reduction of borrowing costs to an average of 12 percent over the past three years for the country. from 24 percent in the early 2000s. ÔÔ External interest rates on government bonds dropped Today, debt management governance in Brazil is considered to 5 percent from 9 percent over the same period. best practice, with only one entity responsible for the de- ÔÔ Debt composition improved dramatically. In 2002, 35 sign and implementation of financing strategies instead of percent of Brazil’s debt was linked to foreign exchange the role bring shared between STN and the central bank. rates, whereas by 2008 the country was a net creditor STN has world class back, middle and front offices operat- in this debt class. Variable interest rate debt dropped to ing an integrated debt management system with accurate, 31 percent in 2008 from 42 percent at the end of 2002, real-time information. Accordingly, STN is able to prepare while the proportion of fixed interest rate borrowings medium term debt strategies and annual borrowing plans rose to 27 percent in 2008 from just 2 percent in 2002. with specific targets for debt composition. It is also clearly Average debt maturity increased to 27 months from 11 accountable for the implementation of these plans. These months between 2002 and 2008. achievements were recognized by the International Fi- ÔÔ Overall, interest payments fell to less than 6 percent of nance Institute, which ranked Brazil—STN and the central GDP in 2008/09 from 9 percent in 2002. bank—first among a group of 30 emerging markets for its investor relations services (Brazil was the only country to As a result, the reduction of financing costs has allowed the achieve a perfect score) and the quality of the debt statistics Brazilian government to reallocate resources amounting 3 produced and published by the country. percent of GDP that previously were consumed in debt ser- vice obligations to the expansion and increased quality of Part of Brazil’s success can be explained by the advances ob- public service delivery. In particular, the inception of mod- served in federal debt management that was directly sup- ern conditional cash transfers and improvements in educa- ported by the IBRD’s Fiscal and Financial Management tion and health services has contributed to a dramatic fall Technical Assistance Loan (FFMTAL) program. In partic- in poverty to 24 percent in 2008 from 34 percent in 2002. ular, IBRD and international specialists helped design the internal organization and decision structure of the Debt The improvement in public debt management also has Management Office and the Bank worked with the authori- helped protect Brazil from the severity of the global finan- ties on the successful transfer of debt management responsi- cial crisis. The change in debt composition, especially its bilities and institutional arrangements between the central shift to being a net creditor in dollar-denominated debt, bank and the STN. Together with the strong fiscal adjust- meant that the recent decline in the value of the Brazilian ment, the flexible exchange rate, and the inflation-targeting currency actually served to reduce government debt to 38 regime, the improved debt composition resulted from the percent of GDP in December 2008 from 42 percent in Au- enhanced institutional and technical capacities at the STN. gust the same year. The positive impact on indebtedness is the payoff for the debt management strategy adopted since As mentioned above, the role of the Bank’s FFMTAL opera- 2003 aimed at reducing exposure to exchange rate shocks tion in these successes is difficult to measure, just as it would and increasing international reserves. be virtually impossible to disentangle and estimate of the net impact of a more professional debt management organiza- Given the strong macroeconomic fundamentals built over tion and framework on better informed decisions at both the a decade to 2008, Brazil achieved an investment grade rat- strategic and operational levels. Nonetheless, to put this in IBRD RESULTS 3 perspective, Brazil’s debt level as at October 2009 was R$1.5 trillion. If an improvement of only 0.1 percent in the value of the debt resulted from the deep and broad-ranging debt management reforms described above, the annual savings alone for Brazil would stand at R$140 billion in a single year of operation. If the improvement was only .01 percent then the resulting savings would still be R$14 billion/year. More importantly, the reduced vulnerability to shocks prompted by an active debt management strategy helped Brazil in ab- sorbing the impact of the crisis and paved the way for a quick recovery. The magnitude of the fiscal risks and potential sav- ings amply justified the Bank’s targeting of debt management, pre-loan technical assistance, and long-running loan prepa- ration and implementation support. Brazil’s subsequent re- quest for the final phase of funding under the IBRD program called for reform of three main pillars. First, an integrated is further evidence that the government also recognizes the debt management system would be created that linked bud- importance of this work. The strategy and implementation getary, financial, and asset and liability systems in an elec- of the reforms that took place with the support of the FFM- tronic format that ensured real-time data availability. This TAL loan, which included technical and fiduciary oversight, would give STN officials a prototype of an integrated debt covered a period of seven years (including two extensions). management tool. The second pillar was to improve institu- In May 2009, the Bank approved funding of a final develop- tional arrangements to enhance the governance and organi- ment phase, covering one more year of work. zational decision structures for debt management, including reform of the back, middle and front office functions. The Finally, the training and dissemination activities under the third pillar would upgrade STN’s analytical capacity to reform program allowed a permanent interchange with uni- develop portfolio benchmarks, manage risks, and identify versities and made STN’s debt unit a center of excellence optimal strategies to achieve them. In addition, IBRD also on debt management methodologies, risk management, performed a mediator role between the STN and the cen- and other quantitative tools. The quality of the debt strat- tral bank that allowed a gradual and coordinated transfer of egy reports, annual borrowing plans and other documents debt management responsibilities to the STN. produced by the debt management team showcases the pro- fessionalism of the human resource policies that directly sup- The challenge was also to do all of this in a timely and sys- port this unit. tematic manner using an IBRD loan, the “Fiscal and Finan- cial Management Technical Assistance Loan” (FFMTAL), as a vehicle to marshal worldwide organizational, procedur- Approach al and systems best practices. The Ministry of Finance approached the Bank in 1999 to Bank specialists worked intensively with Brazil on develop- request assistance in assuming and modernizing the debt ing a systematic and rigorous program. In parallel, from 1999 management function. The Bank worked intensively with to 2002 the Bank prepared a Programmatic Fiscal Reform the STN staff for two years preparing a debt management Structural Adjustment Loan (PFRSAL) to improve fiscal framework in line with international best practices. For this performance through incentives for fiscal responsibility and activity, IBRD allocated high-level staff from its treasury, the improvement of debt management. As a result, in 2001, a capital markets, and economic management teams to work Bank technical assistance loan was agreed to assist the govern- with the Brazilian government in the design of a strategy ment to meet the general objectives set forth in the PFRSAL. to improve STN debt management capacities. The strategy The FFMTAL operation was approved in 2001 for US$8.9 4 Brazil’s Public Services Get Welcome Boost from Better Debt Management million, supporting four main components: strengthening [7] Country Assistance Strategy 2004–2007. Sound mac- the results based budget framework; debt management; the roeconomic Foundations as the pillar for a more Equi- Fiscal Responsibility Law; and financial management. table, Competitive and Sustainable Brazil. [8] 2008–09 Global Economic Crisis On the debt management component, the Bank provided [9] 2009 Supplementary Finance. Bank extends a finan- technical assistance in the development of terms of refer- cial and administrative strengthening loan (PACE) ence for a battery of consultants charged with reviewing adding supplementary funding for a final phase of debt organization and processes. A decision was also taken to management work. develop a debt management system “in-house” rather than adapt an existing off-the-shelf system, recognizing Brazil’s complex and singularly unique debt management demands. Ibrd Contribution At every step of the way the Bank supported Treasury and exercised due diligence in ensuring that the necessary work The Bank was a key catalyst contributing to the enhance- was procured and carried out in conformance with Brazil’s ment of the Brazilian government’s current debt manage- needs, and is also significant that STN has requested Bank ment approach. STN could have elected to work with its support in further refining and completing the project own quasi-governmental information technology company, which turned out to be significant larger and more expen- but chose instead to work with the World Bank. The techni- sive than initially projected. cal assistance provided to Brazil prior to the FFMTAL loan and during its design and implementation, including the definition of terms of reference for consultancies as the debt Summary Timeline management framework evolved, was critical to successful results. The IBRD’s financial contribution to debt manage- [1] 1994 Real Plan. Inflation reduced from 2,500 percent ment activities developed by the FFMTAL and the Sustain- in 1993 to 4 percent in 1998 able and Equitable Growth loan (PACE) is presented below. [2] 1995–98 Structural Reforms. Opened markets, price liberalization, privatizations World Bank Technical Assistance Loan Allocations [3] 1997–2002 Macroeconomic Vulnerability to Exter- for Debt Management in Brazil (In USD) nal Shocks. Asian, Russian, Sept 11 2001, Confidence Debt Management—FFMTAL Crisis 2002--raised debt from 40 percent of GDP in World Bank 5,851,313 1998 to 57 percent in 2002. [4] CAS 2000–2003. Financial support to Brazil to con- Government Counterpart 462,120 solidate macroeconomic stabilization in a period of sig- Debt Management—PACE 1,880,000 nificant macroeconomic vulnerabilities. Total 8,193,433 [5] 2000–2003 World Bank Policy Loans. PRFSAL I (2000), PRFSAL II (2001), PRFSAL III (2002). Objectives of the programmatic PRFSAL were the In addition, Bank preparation and supervision budgets in resumption of fiscal sustainability through the imple- the seven years amounted about US$600,000. In parallel sev- mentation of a strong fiscal adjustment and institu- eral analytical and advisory (AAA) activities complemented tional enhancement in fiscal management. A technical the FFMTAL program. In particular, the conceptual work sssistance loan, FFMTAL, served as the instrument for summarized in the World Bank — IMF report “Guide- capacity building activities linked to these objectives. lines for Debt Management” has been a building block in [6] 2003–2008 Macroeconomic Consolidation. Brazil the design of the enhancement of debt management strat- achieved investment grade in April 2008, and growth egy. Related activities also comprised the preparation of the averaged 4.7 percent (from 2.5 in the previous period, Country Economic Memorandum of 2003 entitled “Brazil: 1997–2002); Stability for Growth and Poverty Reduction” that included IBRD RESULTS 5 a deep assessment of debt management options at that time and suggested the end of the link between debt and the exchange rate. The preparation of this memorandum also encompassed the organization of workshops and seminars at which debt management was one of the most prominent and important issues. Taking into account the FFMTAL’s preparation and supervision budgets and additional activi- ties, the Bank’s own outlay may reach around US$1 million. Partners with participants from five sub-national governments and a Counterpart: National Treasury Secretariat (STN). Re- Debt Management Performance Assessment—(DeMPA – sponding to a June 2009 Investment Completion Report a methodology developed by the WB and applied to several (ICR), STN said that FFMTAL contributed to the institu- countries) has been performed for Rio Grande do Sul, the tional strengthening of debt management through providing first for any client sub-national government in the world. international experience and technical support for organiza- The World Bank also continues to be actively engaged in tional consolidation, analytic capacity building and the over- several debt management and debt market development all development of the debt system. STN also mentioned the technical assistance programs and training around the importance of the World Bank’s continuous support, notably world, reaching more than 30 countries in the past four regarding the development and implementation of the second years. It is very likely that this experience will be tailored phase of the Integrated Public Debt Management System. to, and replicated in, other IBRD client countries in com- ing years. Brazil’s STN and the World Bank also co-edited a The Planning Ministry and the Finance Ministry co-man- book in 2009 on Brazilian public debt. The book describes aged the loan. FFMTAL project procurement also involved the history, concepts and technical aspects of Brazilian pub- the technical cooperation of the United National Develop- lic debt management and markets, highlighting the success- ment Program, together with supervision by the Brazilian ful capacity building effort that took place in recent years. Cooperation Agency. Moreover, the recent joint WB-STN publication “Pub- lic Debt: the Brazilian Experience” is a key vehicle to dis- Good Practices Developed/ seminate the lessons learned and debt management capacity built in Brazil with World Bank support. More than 2,000 Replicated copies of the book have been distributed in Portuguese, and an English version will be published in 2010. Brazil’s experience with the FFMTAL debt management initiative is seen as best practice and its lessons are being shared by the Bank. The type of engagement and the on- Next Steps going policy dialogue during project preparation resulted helped its satisfactory implementation. The Bank’s supervi- As mentioned above, the Bank is financing the completion sion activities also allowed it to retain flexibility to adapt of Brazil’s Integrated Debt System through supplementary and adjust the project according to the evolving circum- finance added to the recently restructured and extended stances. The World Bank is also working with Brazilian state PACE operation. governments—Brazil is a leader in Bank sub-national lend- ing—and sharing the experience and knowledge obtained The Bank also continues to work with individual state gov- at the national level. In 2009, two workshops were held ernments to improve their debt management capacity. 6 Brazil’s Public Services Get Welcome Boost from Better Debt Management learn more Links to key related sites: www.stn.fazenda.gov.br Book Divida Pública: a Experiencia Brasileira (STN, World Bank, 2009) found at: www.stn.fazenda.gov.br/divida_publica/livro_divida.asp Basic Information Fiscal and Financial Management Country: Brazil Project Name: Technical Assistance Loan Project ID: P073294 L/C/TF Number(s): IBRD-46040 ICR Date: 06/23/2009 ICR Type: Core ICR Lending Instrument: TAL Borrower: GOVERNMENT OF BRAZIL Original Total Commitment: USD 8.9M Disbursed Amount: USD 8.0M