Lessons from the Crisis and
Progress Made in Developing Local
Currency Bond Markets in Brazil
André Amante
November 2009
1
Agenda
9 Domestic Government Securities
9 Brazil at the Outset of the Crisis
9 The Crisis effects and the Central Bank’s
Measures
9 The Global Crisis and the Domestic Markets
9 Identifying Potential Improvement Areas
2
Domestic Government Securities
45
40
Stock issued
Average
maturity
1400
35
1200
30
Inflation
linked
25
1000
800
20
600
Floating rate
15
R$ billion
months
1600
400
10
200
Fixed rate
5
Source: Central Bank of Brazil
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
0
Jan-04
Jan-02
0
Jan-03
US$ linked
3
Brazil at the Outset of the Crisis: Fiscal Policy
Primary fiscal result (% GDP)
flows accumulated in 12 months
Net public debt (% GDP)
4
3
50
% GDP
% GDP
55
45
2
1
0
40
-1
35
-2
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
97 98 99 00 01 02 03 04 05 06 07 08 09
Jan
09
International reserves
BRL/US$ - exchange rate
200
US$ bilhões
4
3
2
1
Jan
02
150
100
50
0
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Source: Central Bank of Brazil
Jan
09
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
4
Brazil at the Outset of the Crisis: Monetary Policy
10
IPCA accumulated in 12 months and target
8
set 09:
4,34%
Market’s
Expectations
2009:
4,30%*
%
6
4
2
0
Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec
03 04 04 05 05 06 06 07 07 08 08 09 09
Source: Central Bank of Brazil
Nov
10
5
Bank-Capital Adequacy: Basel index
Source: Central Bank of Brazil
6
Di future interest rate and private bond market
Di future interest rates (% aa)
CDB and Debentures (R$ billion)
900
40
1997
35
Debentures
1998
700
R$ billion
2002
30
2004
25
2006
2009
20
600
500
400
15
300
10
200
5
100
Source: BM&FBOVESPA, CETIP
12
Jan 09
years
10
Jan 08
8
Jan 07
6
Jan 06
4
Jan 05
2
Jan 04
-
Jan 03
0
0
Jan 02
% aa
Bank Deposit Certificate
800
7
The Crisis Effects
9Collapse of international credit, responsible for 20% of
Brazil’s credit supply
9Extra demand on domestic credit market by firms that
previously financed themselves in international markets
9Lack of funding in the interbank wholesale market
9Credit quality deterioration due to exposure to exchange
rate derivatives
9Credit tightening
9Severe credit restriction for exporters
9Recession in credit sensitive sectors, such as auto
9Stress of small and medium financial institutions
8
Central Bank Measures: liquidity injection in BRL
320
Compulsory reserves reduction: R$ 99.8 billion
Liquidity for smaller institutions: R$ 42.2 billion
Source: Central Bank of Brazil
9
Central Bank Measures: FX markets
¾Liquidity injection in foreign currency
¾Auctions directed at exporters: US$ 24.4 billion
¾Spot market sale of dollars: US$ 14.5 billion
¾Exchange rate swaps (net notional value)*: US$ 22.5 billion
¾Offsetting the Central Bank swap position
Source: Central Bank of Brazil
*since Sep/08
10
The Global Crisis and the Domestic Markets
18
Selic rate
1 year
3 years
% a.a.
16
6 months
2 years
14
12
10
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
8
2,50
Exchange rate (BRL/US$)
2,25
2,00
1,75
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
1,50
Source: Central Bank of Brazil, BM&FBOVESPA
11
The Crisis and the Markets – Gov. Bonds and DI
Gov. bonds – average daily
trading volume
18
14
80
12
R$ billion
R$ billion
100
Inflation linked
Floating rate
Fixed rate
16
DI future – average daily
trading volume (notional
value)
10
8
6
4
60
40
20
2
Source: Central Bank of Brazil, BM&FBOVESPA
Oct-09
Aug-09
Jun-09
Apr-09
Feb-09
Dec-08
Oct-08
Aug-08
Oct‐09
Jul‐09
Apr‐09
Jan‐09
Oct‐08
Jul‐08
Apr‐08
Jan‐08
Oct‐07
Jul‐07
Apr‐07
Jan‐07
Jun-08
0
0
12
The Crisis and the Markets – Gov. Fixed Rate Bonds
LTN – spread over Di rate
50
40
bp
Jan/09
Apr/09
Jul/09
Oct/09
Jan/10
Apr/10
Jul/10
Oct/10
Jan/11
140
120
20
Jan/10
Jul/10
Jan/11
Jan/12
Jan/13
Jan/14
Jan/17
100
bp
30
Oct/08
NTN-F – spread over Di rate
80
60
10
40
0
20
-10
Source: Central Bank of Brazil
Oct-09
Sep-09
Aug-09
Jun-09
May-09
Mar-09
Feb-09
Dec-08
Nov-08
Sep-08
Aug-08
Jul-08
Oct-09
Sep-09
Aug-09
Jun-09
May-09
Mar-09
Feb-09
Dec-08
Nov-08
Sep-08
Aug-08
Jul-08
0
13
The Crisis and the Markets – Non-Resident Investor
Domestic Government Securities
Di futures contracts
-300
100
Institutional Investors
Financial Institutions
Non-resident Investors
90
-200
LFT
70
R$ billion
NTN-B
60
50
-100
0
NTN-F
40
100
30
20
200
LTN
10
0
Source: Central Bank of Brazil, CVM, BM&FBOVESPA
Oct-09
Aug-09
Jun-09
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Aug-07
Sep-09
Jul-09
May-09
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
300
Jul-07
R$ billion
80
14
Identifying potential improvement areas
9How to increase the trading volume of the
government securities
9How to develop the non-financial corporate bond
market
9The operational framework for Central Bank
intervention in the money market
15
Lessons from the Crisis and
Progress Made in Developing Local
Currency Bond Markets in Brazil
END
André de Oliveira Amante
Central Bank of Brazil
Open Market Operations Department
E-mail: andre.amante@bcb.gov.br
16