2018

Amazonian Sunset
Federal Public Debt
Annual Report

Minister of Economy
Special Secretariat of Finance
National Treasury
 Federal Public Debt/Annual Report/2018 - National Treasury 2

Public Debt Undersecretary

Ministry of Economy José Franco Medeiros de Morais
Paulo Roberto Nunes Guedes Head of Public Debt Operations Office
Luis Felipe Vital Nunes Pereira
Ministry of Economy Executive Secretaria Head of Public Debt Strategic Planning Office
Marcelo Pacheco dos Guaranys Luiz Fernando Alves

Head of Public Debt Control and Payment Office

Márcia Fernanda de Oliveira Tapajós
Special Secretary of Finance
Waldery Rodrigues Júnior Staff
Ana Carolina Kanemaru Fetter
André Duarte Veras
National Treasury Secretartty
Cecília de Souza Salviano
Mansueto Facundo de Almeida Junior
Clarissa Pernambuco Peixoto da Silva
Cláudio Araujo de Freitas Gago
National Treasury Deputy Secretary Daniel Cardoso Leal
Otavio Ladeira de Medeiros Daniel Klug Nogueira
Diego Antonio Link
Flávia Fontoura Valle May
Undersecretaries
Francisco Onivaldo de Oliveira Segundo
Adriano Pereira de Paula Frederico Schettini Batista
Gildenora Batista Dantas Milhomem Gian Barbosa da Silva
José Franco Medeiros de Morais Giovana Leivas Craveiro
Líscio Fábio de Brazil Camargo Gustavo Magalhães Roriz
Pedro Jucá Maciel Gustavo Matte Russomano
Priscilla Maria Santana
Gustavo Miguel Nogueira Fleury
Helano Borges Dias
Helio Henrique Fonseca Miranda
João Franco Neto
José Eduardo Pimentel de Godoy Junior
José Inácio Burnett Tessmann
Josiane Kuhnen da Silva Almeida
Krisjanis Figueiroa Bakuzis
Leandro Galvão
Lena Oliveira de Carvalho
Leonardo Martins Canuto Rocha
Luciana Maria Rocha Moreira
Marcelo de Alencar Soares Viana
Marcelo Rocha Vitorino
Marcia Paim Romera
Marcos Demian Pereira Magalhães
Marcus Vinícius Socio Magalhães
Mariana de Lourdes Moreira Lopes
Mariana Padrão de Lamonica Freire
Nathália Filgueiras de Almeida
Nucilene Lima de Freitas Franca
Paulo Moreira Marques*
Petronio de Oliveira Castanheira
Plínio Portela de Oliveira
Roberto Beier Lobarinhas
Rosa Isabel Cavalcanti
Ruth Lacerda Benfica
Victor Valdivino Caetano de Almeida
Vinicius Pinto de Menezes
* Supervision

Federal Public Debt: 2019 Annual Report.

1/Ministry of Economy, Special Secretariat of Finance,
National Treasury, Brazilia: National Treasury Secretariat,
January 2019, number 16.
1. Federal Public Debt 2. Federal Public Debt Annual
Report 3. Public Debt Management 4. Planning 5. Strategy
I. Brazil. National Treasury Secretariat II. Title
Information
Phone: +55 61 3412-1843
E-mail: ascom@tesouro.gov.br
Web site: tesouro.fazenda.gov.br/en/homeen
Federal Public Debt: The Annual Debt Report is an annual-basis publication of the National Treasury.
Full or partial reproduction is authorized provided the source is fully acknowledged..
Art
Press Office (ASCOM/National Treasury)
Graphic Design and Layout: Viviane Barros, Hugo Pullen e Júlia Mundim

Last update: 01/25/2019

 Federal Public Debt/Annual Report/2018 - National Treasury 3

Sumário
Mata de Araucárias

National Treasury Statement 4

1 Evolution of the International and Brazilian Economy in 2018 5
2 Results Achieved 10
2.1 Borrowing Requirements 10
2.2. Strategy and its Implementation 15
Domestic Debt 15
Outcomes Achieved 16
External Debt 18
2.3. Federal Public Debt Indicators and Risk Management 19
Stock 19
Maturity Profile and Refinancing Risk 20
Maturity Profile and Rollover Risk 21
The Cost of the Public Debt 22
2.4 Investors Base 24
2.5 Guarantees Granted by the Federal Government and Assets Against Subnational Entities 26

3 Innovations and Topics in Development 28

Fixed Income Exchange Traded Fund 28
Performance of public bonds índices 29
Dealers System And Secondary Market 30
New Regulation of Debt Securities - Decree No 9.292 Of 23 February 2018 30
Working Group – Outstanding Volume Statistics FPD 31
Guarantees Granted by the Federal Government in Credit Operations-SID in 2018 32
Tesouro Direto Retail Program 32
Communication Efforts With Society 33
New Series of Vídeos on the Golden Rule 33
Public Debt Projections Report 34
Quarterly Report " Within The Debt Accounts” 34

4 Conclusion 35
 National Treasury Statement Federal Public Debt/Annual Report/2018 - National Treasury 4

National

xxxxxxx
The National Treasury pursues the mission of managing public accounts with efficiency and transparency, ensuring fiscal
balance and the quality of public spending. In view of this mandate, the Annual Debt Report (ADR), which we present
here in its 16th edition, represents an instrument of transparency, accountability and elucidation to the society about

Treasury
the Federal Public Debt (FPD) and the main results achieved by its management throughout 2018.

This report highlights the FPD composition characterized by low foreign exchange debt exposure, low maturity con-

Statement
centration in the short term, as well as having a diversified investor base and a comfortable cash position to face
borrowing requirements. These features offered flexibility for FPD management in the scenario of fiscal deficits
prevailing in recent years and during the periods of increased market volatility experienced in 2018. Throughout
the year, the trend of increasing the share of floating-rate bonds in the FPD composition, which has been picking up

Tropical forest
since 2015, was confirmed. Well accepted by the investors in times of greater risk aversion and volatility, LFT bonds
allow the Treasury to minimize the cost of excessive risk premiums that may arise in more volatile circumstances.
The FPD comprises
The favorable monetary policy cycle in a context of inflation under control, supported the Selic rate at the historical the sum of domestic
minimum throughout almost the entire period. This provided a reduction in FPD cost indicators, which mitigated the federal public debt
adverse impacts related to the fiscal deficit environment over the debt dynamics. (DFPD) and external
federal public debt
The results presented in this report confirm the FPD management commitment with the objective of reducing debt (EFPD), the latter
funding costs in the long term, while maintaining debt portfolio risks at prudent levels, and contributing to the pro- being subdivided into
per functioning of the Brazilian public bonds market. bonds and loans. The
ADR refers to the FPD
ADR presents not only the performance of a series of indicators related to FPD, but also points out the various ins- outstanding in the
titutional progress that assist the process of improving public debt management and communication with society. market.
Thereby the document highlights some of the innovations launched by the Treasury in 2018, as the Report on Pu-
blic Debt Projections, the series of explanatory videos about the Golden Rule, the improvements on the retail public
bonds program and the Decree No. 9.292 of 23 February 2018, a new regulatory framework for debt bonds. These
efforts add to the ADR in accomplishing the Brazilian Treasury primary objective to foster debates related to public
debt and public accounts in society.

The National Treasury Team

Objectives and
Guidelines of
the DPF

International
1 and Brazilian
Economy Developments in 2018
In 2018, the international scenario shifted from the favo-
rable conditions prevailing during the previous years, be-
coming more challenging and volatile. Despite still robust
global growth, turmoil in global financial markets has been
observed since the beginning of the year. The United States
economy continued the process of gradual monetary policy
normalization, given the scenario of moderate acceleration
of inflation, accompanied by solid economic growth and a
hot labor market. Trade tensions between relevant countries
in international market have raised concerns for economies
with high exposure to the U.S.
During the ending months of 2018, signs of Chinese economy
deceleration became clearer, although not constituting a hard-
landing. Partially this scenario unfolded as a consequence
of the Chinese government adjustments to control fiscal
and credit risks. In Europe, growth also decelerated in 2018.
Federal Public Debt/Annual Report/2018 - National Treasury 5
Beach of Canoa Quebrada, Ceará, Brazil
Adding to the more challenging external environment, the
negotiations on the United Kingdom leave from the European
Union (Brexit), Italy's dispute with the European Commission
over the 2019 budget, and geopolitical tensions in the region
contributed to this scenario.
The less favorable external environment resulted in the
strengthening of the dollar in the international market, which
mainly affected emerging countries. Furthermore, the strong
devaluation of Turkey's currency has caused turbulence in the
markets and a domino effect in other emerging countries,
particularly in economies highly dependent on foreign
capital, such as Argentina, characterized by large twin deficits
(current account and fiscal), dollarized public debt and scarce
international reserves. The effects were not only on the
exchange rate, but also on the risk levels of these economies.
1 Evolution of the International and Brazilian Economy in 2018 Federal Public Debt/Annual Report/2018 - National Treasury 6

Aerial view of a tropical forest in Brazil

Figure 1 – 5-year CDS rate: Brazil and peers Figure 2 – Exchange rate (BRL/US$) performance in 20188
4.40
690
4.20
590
4.00
490
3.80
Base points

390
3.60
290
3.40
190
3.20
90
3.00
Apr-17
Jan-17

Mar-17

Jun-17

Dec-17
Jan-18

Mar-18
Apr-18

Jun-18

Dec-18
Jul-17
May-17

Aug-17

Oct-17

Jul-18
Nov -17

May-18

Aug-18

Oct-18
Nov -18
Feb-17

Sep-17

Feb-18

Sep-18

Apr-18

May-18

Aug-18

Oct-18

Nov-18
Jul-18

Dec-18
Mar-18

Jun-18

Sep-18
Jan-18

Feb-18
Argentina Colombia Brazil Russia
South Africa Turkey Mexico

Source: Bloomberg
Source: Central Bank of Brazil

In addition to the external factor, the Brazilian exchange rate
movement was partially associated with uncertainties that
marked the electoral process in Brazil and contributed to asset
prices volatility. Thus, the exchange rate, which fluctuated
around BRL/US$ 3.25 in early 2018, broke the BRL/US$ 3.50
level in May and surpassed the BRL/US$ 4.00 ratio in mid-
August. In the last months of the year, with the reduction on
the level of uncertainty, the exchange rate returned to values
below BRL/US$ 4.00, closing the year at BRL/US$ 3.87.
However, the Brazilian economy presented a greater capacity
to withstand the international scenario volatility compared
to peers, given its robust balance of payments, anchored
inflation expectations, economic recovery prospects and
low external indebtedness. The country's external accounts
continued to perform well during the year, with a low current
account deficit, high foreign direct investment (FDI) and
international reserves at safe levels, placing Brazil in a more
favorable situation than other emerging markets.
1 Evolution of the International and Brazilian Economy in 2018 Federal Public Debt/Annual Report/2018 - National Treasury 7

Paisagem por do sol na Chapada dos Veadeiros, Goiás, Brazil

In the domestic environment, after going through one of
the longest and deepest recessions in the 2015-2016 period, Figure 3 –Development of market projections for inflation
the Brazilian economy followed its recovery process, which and GDP
began in 2017. However, the recovery was slower and more
gradual than previously anticipated. The same pattern Inflation (% per year)
occurred in the labor market, with impacts on household 4.60
4.40
consumption that also influenced a weaker GDP. Thus, while 4.20
market forecasts at the beginning of 2018 indicated growth 4.00

close to 2.7%, expectations fell to around 1.3% at the end of 3.80

3.60
the year. In addition to the effects of the truck drivers' strike, 3.40
the external scenario and electoral uncertainties explain the 3.20

more modest than expected performance of the economy. 3.00

Jan/18

Feb/18

Apr/18

Jun/18

Sep/18

Oct/18

Dec/18
Mar/18

May/18

Jul/18

Nov/18
Aug/18
During the most critical period, between May and June, GDP
grew by merely 0.2% in the second quarter, recovering in inflação 2018 2019

the following quarters.

Price behavior was favorable during 2018, with several GDP Growth (%)
underlying inflation indexes operating at low levels, including 3.50

the components more sensitive to the business cycle and 3.00

monetary policy. From May onwards, inflationary risks arising 2.50
from shocks such as the truck drivers’ strike or the effect of 2.00
other uncertainties on the exchange rate have resulted in
1.50
an increase in inflation expectations for the year, but these
1.00
have still remained below the central target set by the Central

Feb/2018

Sep/2018
Mar/2018

Jun/2018

Jul/2018

Oct/2018

Nov/2018
jan/2018

Apr/2018

Aug/2018

Dec/2018
May/2018
Bank. In addition, the impact of these shocks was limited over
time, without significantly affecting expectations over longer 2018 2019
horizons. The IPCA ended 2018 at 3.75% and successfully met
the central target, which was 4.5%.

Source: Central Bank of Brazil (Focus Market Report)

1 Evolution of the International and Brazilian Economy in 2018 Federal Public Debt/Annual Report/2018 - National Treasury 8

Thus, the process of monetary easing that had started in 2017 The yields in the medium-and long-term benchmarks were
continued. Observing the Brazilian yield curve, expectations the most affected, with increasing risk premiums due to the
regarding the pace of the resumption of economic activity uncertainties underlying the scenario. The short-term rates also
influenced the fall in short-term interest rates until mid May, assumed an upward path, reflecting the expectation of a more

Small river in an overview of forest

when the COPOM meeting statement indicated the end of restrictive monetary policy, mainly due to the exchange rate
the reference rate reduction cycle, which stabilized at around depreciation. Movements in the yield curve reverted towards
6.5% per annum since then. In COPOM's communications, the end of the year as the main uncertainties dissipated.
the forecasts were still of economic recovery and electoral
uncertainties were already incorporated. In the fiscal front, the focus is still in the need to reverse the
path of public accounts imbalance and debt growth. The
Figure 4 – Yield Curves – Y.o.Y % recent primary results dynamics shows the improvement
in short-term fiscal management, through the discretionary
14.0
expenditures’ rationalization and revenues recovery, which
13.0
contribute to a primary deficit of the central government below
12.0
the target for the year. However, the effort for adjustment is
11.0 still undermined by high social security deficits, which limits
10.0 government capacity to meet other demands from society,
9.0 such as social policies and investments.
8.0
7.0 The absence of primary surpluses and political difficulties for
6.0 implementing a reform agenda in recent years have contributed
to weakening the economic environment, culminating in the
Feb/18
Jan/18

Jun/18

Sep/18

Oct/18

Dec/18
Mar/18

Jul/18
Apr/18

May/18

Aug/18

Nov/18

recession observed between 2014 and 2016. There was,

6 months 3 years
Source: Bloomberg
From May onwards, the yield curve began to reflect the
increased risk arising from events such as the truck drivers’
movement, the elections, the difficulties for advancing the fiscal
reform agenda and the international scenario uncertainties.
10 years therefore, a direct impact on the General Government Gross
Debt (GGGD), which represented 51.7% of GDP at the end of
2013 and can surpass 80% of GDP between 2020 and 2021,
according to the central forecasted scenario, which is based
on the implementation of reforms to control expenditures
and compliance with the spending cap. For more information
on GGGD projections and underlying scenarios, see the Report
on Public Debt Projections.
1 Evolution of the International and Brazilian Economy in 2018 Federal Public Debt/Annual Report/2018 - National Treasury 9

Figure 5 – DBGG/GDP dynamic and probability ranges

Paisagem da Caatinga no Brazil

90

85
80.1 80.6 80.4 79.7
79.3
80 78.2 78.4
76.7 76.5
74.0 74.3
75
70.0
70

% of GDP
65.5

65
62.2

60
59.1 59.2 Projections
56.7 56.3
55.4 55.8 55.5 55.8

55 51.8 53.8
51.7
51.7 51.3

50
*

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
(*) As of November 2018

*Position at: november 2018

Source: Central Bank of Brazil
Projections: National Treasury

Therefore, the need for structural reforms, in particular, the social security
reform, is still crucial to reverse the growth of mandatory expenditures and
reduce budget rigidity, in order to enable positive primary results and support
a sustainable GGGD/GDP dynamic.
 Federal Public Debt/Annual Report/2018 - National Treasury 10

Outcomes
2

Swamps in Belém, Pará, Brazil

Achieved

After discussing the macroeconomic context for debt
management in 2018, this section comments the results
achieved, considering the borrowing requirements for the year,
the implementation of the internal and external borrowing
strategy, as well as the performance of the outstanding debt
and the main FPD profile indicators.
2.1 Borrowing requirements
and other expenditures to be paid with public bonds issuan-
ces, in a context of primary fiscal deficit.
The concept of net borrowing requirements is obtained by
subtracting from the gross borrowing requirements resour-
ces not raised through government bonds that are intended
for debt repayment. These resources reduce the requirement
for issuances to meet government liabilities.

FPD gross borrowing requirements can be broke down into

three elements: FPD maturities, which include interest on the
public bonds’ portfolio held by the Central Bank; the value
paid to honor subnational governments guaranteed debt;
2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 11

Serra da Capivara, Piauí, Brazil

Figure 6 – National Treasury borrowing requirements In Figure 6, which compares figures forecasted in Annual
Forecasted Executed Borrowing Plan (ABP) 2018 with those verified at the end of
the year, the net borrowing requirements for the year were
External External BRL 651.1 billion. This result has benefited from BNDES
Domestic Debt Debt Domestic
Debt held by
BRL 9.5 bn BRL 10.5 bn
Debt held by prepayments of contracts with the National Treasury in the
the Market the Market
BRL 617.3 bn BRL 677.5 bn amount of BRL 130 billion. The efforts to comply with the
BRL 65.1 bn golden rule, which implied the use of a larger-than-forecasted
FPD Maturity FPD Maturity
share of budget revenue for the FPD payment, such as flows
Interest Due BRL 710.7 bn BRL 775.8 bn Interest Due from the extinction of the Sovereign Fund (BRL 27.5 billion)
to Central Bank* to Central Bank*
BRL 83.9 bn BRL 87.8 bn and the National Development Fund (BRL 17,4 billion) have also
contributed to reduce net borrowing requirements. On the
Partial Deficit
Coverage
BRL -18.9 bn Partial Deficit
Coverage
expenditure side, the increase in FPD maturities in 2018 was
BRL 108.4 bn BRL 89.5 bn
mainly due to extraordinary repurchase auctions from May
(BRL 24.2 billion1) and to domestic debt issuances of bonds
with less than 12 months maturity (BRL 13.5 billion).
Guaranteed Guaranteed
Debt Payments** BRL 0.3 bn Debt Payments**

BRL 4.5 bn BRL4.8 bn

BNDES BNDES
Prepayment Prepayment
BRL 130.0 bn BRL 130.0 bn
Budgetary Budgetary
Resources BRL 32.9 bn Resources

BRL 186.1 bn BRL 219 bn

Others Others

BRL 56.1 bn BRL 89 bn

Net Borrowing Net Borrowing

Requirements BRL 13.6 bn Requirements

BRL 637.5 bn BRL 651.1 bn

* Under Article 39 of the Fiscal Responsibility Law (Law No. 101/2000), the real
interest of the Central Bank's portfolio cannot be refinanced by STN payments in
bonds directly to the Central Bank.
Source: National Treasury
1 
Box 3 of this document provides more information on the extraordinary auctions.
2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 12

Itaimbezinho Canyon Waterfall, Rio Grande do Sul

Box 1 – BNDES prepayment to the National Treasury

In 2018, new prepayments were negotiated with respect to Tabela 1 – BNDES' prepayment proceeds used to reduce government debt in the
the National Treasury loans to the National Economic and market
Social Development Bank (BNDES), originally contracted Prepayment
Prepayment date Date of DFPD Deductions Value Used for Deduction
between 2008 and 2014. The parties agreed on an early (BRL Billions)
payment of BRL 130 billion in four installments. The first 27/10/2017 17
16/11/2017 10.36
13/08/2018* 6.64
payment was executed on March 29 and totaled BRL 30
29/03/2018 30 02/07/2018 30.00
billion; the second, amounting to BRL 30 billion, occurred 29/06/2018 30 13/08/2018 30.00
on June 29; the third, amounting to BRL 40 billion, occurred 13/08/2018 40 13/08/2018 40.00
20/08/2018 30 03/09/2018 30.00
on August 13; Finally, the remaining BRL 30 billion were
paid on August 20. All installments were fully settled in * The total prepayment on 08/13/2018 refers to BRL 17 billion of the installment received in 10/27/2017, that were not
cash. fully used in 2017 once this value exceeded the volume of public bonds maturities in the remaining months of the year.
Source: National Treasury
The total amount of BRL 130 billion represented 28.10%
of the BRL 462.5 billion in BNDES' liabilities against the Cash payments promote a decline in the excess of liquidity in the financial system, consequently
Treasury (in August 30, 2018 values). All resources were reducing Central Bank repurchase operations (repos), once the resources are absorbed by the
exclusively destined to public debt payment. The table National Treasury Single Account. This reduction in repos means General Government Gross
below summarizes the FPD payments in 2018 that used Debt (GGGD) decreases by the exact amount of BNDES prepayments.
resources from BNDES prepayment proceeds. In 2018,
part of the resources from the last 2017 prepayment However, these operations do not have an immediate effect on the Public Sector Net Debt
installment, amounting to BRL 17 billion, were also used (PSND), since there is a proportional compensation between the assets and liabilities positions
for debt payment. of public institutions. However, the forecasted PSND dynamic will benefit from savings with
implicit subsidies, generated by the difference between the cost of funding the Treasury and
BNDES loans yields. The total prepayment (BRL 130 billion) is estimated to save about BRL
37.1 billion (present value) in subsidies.
 Maragogi Beach, Brazil
2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 13

Box 2 – Revenues from states and municipalities payments of loans with the federal government

The financial framework between the federal government and the Tabela 2 – Payment of credit operations by states to the Treasury
BRL million
subnational entities has a direct impact on federal government's borrowing Flow after the
Original Flow Impacto Impacto devido
requirements, since subnational governments are National Treasury Law No.
Complementary Fluxo atual de
devido às ao RRF +
Impacto
Laws No. 148 recebimentos* total
9496/97 LCs 148 e 156 Liminares
debtors and these debts’ payment flows are classified under a budget (a)
and 156 (c)
(a) - (b) (b) - (c)
(a) -(c)
(b)
revenue (source 173) destined exclusively for FPD payments. The reason 2016 40,293.88 24,699.30 15,853.52 15,594.58 8,845.78 24,440.36
Executed
for exclusivity is that, to bail out and restructure subnational governments 2017
2018
39,700.19
41,311.41
16,044.98
26,893.31
14,605.40
19,470.12
23,655.21
14,418.10
1,439.58
7,423.19
25,094.79
21,841.29 Payments
debts in the past, the National Treasury had to raise resources in the market Total 121,305.48 67,637.59 49,929.04 53,667.89 17,708.55 71,376.44
2019 42,794.90 28,681.39 18,284.10 14,113.51 10,397.29 24,510.80
by issuing federal public bonds. 2020 43,653.05 28,663.43 18,395.41 14,989.62 10,268.03 25,257.64
2021 44,287.14 28,636.24 20,005.40 15,650.90 8,630.84 24,281.74 Projection
2022 45,504.19 28,667.89 24,157.82 16,836.30 4,510.07 21,346.37
Total 176,239.28 114,648.95 80,842.73 61,590.33 33,806.22 95,396.55
In 1997 the federal government carried out a states' debt restructuring TOTAL 297,544.76 182,286.54 130,771.77 115,258.22 51,514.77 166,772.99
in a context of fiscal struggle for subnational governments. By law No. *The current flow also considers the impact of Law Nº 159/2017 (RRF) and judicial injunctions.
9.496/1997, the National Treasury took over, consolidated and rescheduled Source: National Treasury (constant values CPI-adjusted, as of 01/31/2018).
states bonds’ debt. The states, in turn, undertook a liability against the In this context, the National Treasury has a current flow of revenues (column
federal government, but on more favourable terms and costs. Since then, c) significantly lower than the original flow (column a). Any renegotiation
the Treasury has received monthly revenue flows in budget source 173, reduces the flow to be received from the states and consequently raises
which represents the payments of states relating to the renegotiation of federal government borrowing requirements, increasing the outstanding
their debts with the federal government. Changes in contracts, however, FPD. There are also situations in which the revenue reduction derives from
have significantly reduced revenue flows from this source. situations in which the Treasury, as a creditor, facing a non-payment is
unable to execute the guarantees offered by the subnational government
The table below illustrates the factors that led to reduction in source 173 (collateral), either because it adhered the FRR, or because it obtained a
revenues since 2016, with projections up to 2022. Column "a" represents judicial injunction that impedes the federal government to do so.
the original flow, following the 1997 restructuring. Column “b” presents
payments’ flows from the states after the approval of laws No. 148/2014 Another element that also impacts the resources made available for the
(change in the debts index) and No. 156/2016 (rescheduling). The table FPD payment is the increase in federal government expenditures due to the
also presents the impacts related to the Fiscal Recovery Regime (FRR), need to honor guaranteed debt from states that are in the FRR, related to
approved by law No. 159/2017, and also the effect of judicial injunctions credit operations between them and internal and external creditors. Under
that have eventually allowed some debtor states to suspend debt payments. the law that established the FRR, the Federal Government is not allowed to
execute the counter-guarantees of these contracts, even if it must honor
the guaranteed debt using the resources available in the Single Account,
which increases the future need for government funding.
(To be continue)
2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 14

Box 2 – Revenues from states and municipalities payments of loans with the federal government

The figure below shows the amount funded by the Treasury due to
guarantees honored by the federal government and subsequent non-
recovery of counter-guarantees under the FRR. There are also presented
forecasted values of federal government payments of guaranteed
liabilities of entities under the FRR, to be carried out between 2019 and
2025.
Figure 7 – Treasury expenditure on guaranteed debt
12 42.62
10.73
periods between 2016 and 2018, and between 2019 and 2022. In addition,
in the following figure it is possible to observe that these measures have
represented a subsidy in benefit of some states. This is because the Treasury's
opportunity cost (average cost of NTN-Bs issuances) is higher than the cost
of states debt set by Law No. 148/2014 (approximately CPI+4%).
Figure 8 – Cumulative impact of the measures and costs comparison
(Treasury funding and states)
Impacts of Restructuring and Accumulated Cost
45
Endorsement Honors 45,00%

40 (BRL billions) 40,00%

10 127.36
35,00%
35 30,00%
8.22 31.96 25,00%
8 30 82.03 20,00%
10.66
6.63

(BRL Billions)
6.38 15,00%
25
6 95.40 10,00%
71.38
20 5,00%

4.19 4.08 0,00%

jan/16

may/16

nov/16
jan/17

may/17

nov/17
jan/18

may/18

nov/18
jul/16

jul/17

jul/18
mar/16

sep/16

mar/17

sep/17

mar/18

sep/18
4 15
from 2016 to 2018 from 2019 to 2022
2.39 10 The impact of the debt's growth cost of the states (CPI+4% per year)
2 The impact of the recipt's reduction Average Cost of NTN-B's Emission (cost of the Treasure)
5

0 0 Source: National Treasury (constant values - CPI adjusted, as of 01/31/2018)

2016 2017 2018 2019 2020 2021 2022
Financed value by The Treasury Accumulated Value

Additional information is available in a recent study published by the Treasury,

Source: National Treasury (constant values - CPI adjusted, as of 01/31/2018) entitled Federal Government exposure to the Subnational governments
The consequence of these two factors (reduction of the source 173 insolvency (only in Portuguese) Exposição da União à Insolvência dos Entes
revenues and the need to honor guarantees) is that lower revenues and Subnacionais.
higher expenditures represent a further constraint on the Treasury's
ability to control the increase in public debt, which ultimately represents
a burden to the whole society. Additionally, the reduction of source 173
imposes more pressure on the compliance with the Golden Rule, which
increases restrictions on the government in the use of resources for the
main demands of society.

The figure below shows the cumulative impact of the increase in

expenses related to the FRR and of the decrease in revenue related to
the renegotiations that change the flow of the Law No. 9496/1997 in the
2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 15

Sunset in the fields of the Serra da Canastra National Park - Minas Gerais
2.2. Strategy and its implementation subject to a minimum average effective maturity requirement
of approximately two years, until the end of the first half of the
The implementation of the year. However, this regulation was modified, and a schedule for
The strategy FPD strategy can be analyzed progressive reduction of this requirement was defined until
implementation was by the profile of public its extinction in August 30, 2019. This change contributed to
marked by different bonds issuances and reduce pressures on forward interest rates but shifted part of
periods throughout the redemptions according to the demand for fixed-rate bonds towards other floating rate
year: until May, there type of indexer and maturity. instruments.
was good placement Early in 2018, public debt
of fixed rate bonds management benefited The outbreak of the truck
and long-term bonds; from a more favorable drivers' strike in mid-May,
from June onwards, macroeconomic context, along with the difficulties
there was greater risk characterized by controlled in advancing fiscal reform The amendment to
aversion and demand inflation, low interest rates agenda, quickly raised levels resolution No. 4.444
for floating rate bonds. and confidence in economic of uncertainty and risk reduced pressure on
growth recovery. However, aversion, which led to a more the long-term portion
the rise in the uncertainty conservative approach by of the forward interest
levels and risk aversion public bonds investors. In this rate yield curve and
stemming from domestic and external factors generated context, the National Treasury contributed to smooth
restrictions for FPD’s strategy throughout the year requiring carried out extraordinary the functioning of
adoption of extraordinary actions by the National Treasury. actions starting in June, the public bonds
by conducting buyback secondary market.
Domestic debt and spread auctions, with
the aim of simultaneously
In the first months of 2018, the FPD management relied on reducing interest rate risk
favorable conditions for fixed-rate bonds’ issuances, especially while providing support for the
NTN-Fs and 24 and 48-month LTNs. In January, the highlight public bonds market orderly CMN approves CMN
was the new ten-year fixed rate bond (NTN-F 2029), which functioning. More details on changes to the approves
application of change over
volume issued in the first auction amounted to BRL 3 billion, Box 3. open pension average time
funds to refixing
relying on a good demand for this maturity.

Medium- and long-term fixed-rate securities were specially

demanded in early 2018 by public pensions entities, which were
 Chapada dos Veadeiros, GOias
2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 16

Box 3 – Extraordinary actions

The National Treasury constantly monitors financial market conditions, Figure 9 – Financial volume in the public bonds auctions and DV01
ensuring the maintenance proper price references and the orderly operation
of the public bonds segment and other related financial instruments. 7,000 28,000

Financial Amount Accepted (MM BRL)

6,000
During high volatility periods, the National Treasury can adjust its funding 23,000
5,000

DV01 Issued (MM BRL)

strategy, including extraordinary actions, that might involve changes in the 4,000
18,000

auction calendar, in order to provide support and contribute to restoring 3,000 13,000

market functionality. This was the case in the turbulence context during 2,000 8,000
1,000 3,000
May and June 2018 0
-2,000
-1,000
-2,000 -7,000
In early 2018, a favorable environment in public bonds market allowed the
-3,000 -12,000
issuance of BRL 175.8 billion in fixed-rate and BRL 28.9 billion in inflation-

pr

ov

ec
ar

l
n

ug
b
n

ar

ay

ep

ct
- Ju
linked bonds. With increasing uncertainty since May, conditions changed,

- Ju
Fe
Ja

-O
-M
M

-A

-D
-N
-M

-A

-S
4-

19
1-

21
1-

26

11
13

13
16

14
29

24
generating a risk aversion sentiment. This scenario reflected in increasing Fixed rate NTN-B LFT DV01

CDS contracts prize, rising interest rates and reducing public bonds liquidity.
The National Treasury then cancelled traditional auctions of the domestic
debt bonds and conducted extraordinary actions in order to reduce the
level of interest rate risk in the market. Initially, the Treasury held spread
auctions (simultaneous repurchase and issuance) for long-term fixed-rate
bonds (NTN-F). Subsequently, spread auctions were also held for LTN and
NTN-B bonds.
Balance of extraodinary auctions
Extraordinary auctions result
* The DV01, or Dollar Value of a Basis Point, measures the loss in a fixed-rate bonds portfolio due
to a 1 base-point (0.01%) increase in the bond yield. Thus, the DV01 is a measure of the interest
rate risk added to the market by public bonds issuances.
Source: National Treasury

With this sort of approach, the National Treasury does not seek to influence
bond prices trends. The objective is to avoid sharp short-term fluctuations
that may hinder proper performance of the financial market. The figure
below summarizes the effects of Treasury actions over market risk (level
of DV01*) and over public bonds issuances for the year.
2 Outcomes Achieved
The Treasury resumed gradually the traditional auctions from
the beginning of the second half of 2018. However, at this mo-
ment, market conditions were less favorable than the ones
Morro Dois Irmaos - Fernando de Noronha,
prevailing during the first months of the year, under the in-
fluence of the election cycle and of a more adverse external
environment. In this context, the Treasury opted for greater
caution in public bonds issuances, particularly in fixed-rate
(LTN and NTN-F) and inflation-linked (NTN-B) bonds, in order
to avoid pressuring debt financing cost. Thus, in September,
the 2018 ABP reference ranges were adjusted in order to ad-
mit an increase in the floating rate bonds (LFT) share in FPD
profile, compared to the forecasted at the beginning of the
year.
Tabela 3 – 2018 ABP revision
Compostion of the Anual Original Limits Review Limits
Borrowing Plan 2018 Minimum Maximum Minimum Maximum
Taxa Flutuante 31% 35% 33% 37%
There was no reference ranges review for the other 2018 ABP indicators.
Source: National Treasury
In the definition of the ABP reference ranges, the Treasury
considers multiple macroeconomic and financial scenarios.
However, more intense volatility situations are less likely
to occur and require strategy adjustments. This happened
in 2018, when there was an increase of uncertainty in the
international and domestic scenarios. Consequently, the
conditions for public bonds demand were affected, especially
for longer-term maturity bonds.
Federal Public Debt/Annual Report/2018 - National Treasury 17
Even facing a scenario of prolonged risk aversion, the domes-
tic debt strategy reached a rollover rate1 of 97.0% (96.5%
considering liquidity impact). That means the volume issued
was close to the total domestic debt maturity in the year and
higher than net borrowing requirements. Thus, the debt li-
quidity reserve (liquidity cushion), which worked as a robust-
ness element during the volatility period, was further stren-
gthened.
As in previous years, public bonds issuances in 2018, had four
LTN benchmarks: 6, 12, 24 and 48 months, which represent
the short- and medium-term fixed rate bonds benchmarks;
and two NTN-F benchmarks (January 2025 and January 2029),
representing the long-term references. The fixed-rate bonds
rollover rate was 72.4%, lower than 2017, when it reached
105%. The NTN-F auctions, which were held every two weeks
until 2017, became weekly in 2018, a frequency well received
by the market.
For inflation-linked bonds, the NTN-B auctions were held every
two weeks, in two benchmark groups: Group I, composed
by May 2023 and August 2028 benchmarks; and Group II, in
which were issued May 2035 and May 2055 bonds. The NTN-B
Group II issuance volume was similar to the levels observed in
the previous year, while Group I NTN-Bs were less demanded
due to lower inflation and greater risk aversion scenario.
1 
The ratio between debt issuances and redemptions is called refunding rate or rollover rate.
2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 18

Figure 10 – DFPD issuances and redemptions in 2018 ABP strategy was in harmony with the FPD's smoothing
(BRL billion) maturity structure guideline.
Issuances
677
Redemptions
657
In addition to the traditional auctions, the National Treasury
Net Emissions held quarterly NTN-B exchange auctions, allowing the tran-
381 saction of bonds with debt maturity lengthening effects.
323
276
181
153 142 External Debt
57

São Francisco River

-20 In a volatile year for emerging markets, the National Treasury
-105 -95
tapped the international market only once, when it reopened
Fixed Rate Inflation-Linked Floating Rate DPFD
the current 30-year benchmark, on January 18th. The only
Roll-Over 72% 38% 227% 97% performed operation was in line with the policy of conducting
qualitative external bonds issuances, consolidating good pri-
ce references for Brazilian corporates that might tap external
Source: National Treasury markets and providing greater liquidity to the external yield
curve.
In the case of LFT bonds, low maturity volume in the year
combined with rising issuance of these bonds in 2018 led to In the month of the issuance,
the increase of its participation in the outstanding FPD. LFT particularly, the risk premium
auctions were held every two weeks, in which March and measured by the Credit Brazil takes the
September 2024 and March 2025 benchmarks of the bonds Default Swap (CDS) reached opportunity of the
were offered. The average maturity of these bonds issuan- the lowest levels (146 bps) market window at
ces was, approximately, six years, a level above the outstan- since Brazil’s investment the beginning of the
ding FPD average maturity. grade loss in 2015 (Figure year and reopens the
11), while the external current
The LFT maturing in 2025 was offered from October scenario of excess liquidity 30-year benchmark
onwards, in face of a floating rate bonds issuance higher and positive perspectives for
than initially planned, which resulted in a change in the global growth. The operation
2018 Annual Auctions Schedule1. This adjustment in the allowed the republic to
register a 271 spread over Treasury, a level close to the lowest
The initial plan included the LFT issuances of bonds due in September 2024 throughout the
1 

second semester of 2018. The LFT due in March 2025 will continue to be issued in the first values since the first Global 2047 issuance (Figure 11).
months of 2019.
2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 19

Figure 11 – 5-year CDS and Global 2047 spread Tabela 4 – Main FPD results
600 450 Limits for 2018
Indicators Dec/2017 Dec/18
400 Minimum Maximum
500
350
Outsanding (BRL billions)

CDS 5 years Brazil

400 300
Cataratas do Iguaçu
FPD 3.559.3 3.877.1 3.780.0 3.980.0
250 Composition (%)

Spread
271
300
200 Fixed Rate 35.3 33.0 32.0 36.0
200 150 Inflation-linked 29.6 27.5 27.0 31.0
Floating Rate 31.5 35.5 33.0 37.0
100
100
146
Exchange Rate 3.6 4.0 3.0 7.0
50
Maturity Profile
0 0
% Matiruing in 12 months 16.9 16.3 15.0 18.0
Average Maturity (years) 4.3 4.1 4.0 4.2

8
7
6
5

8
7
6
5

18
17
16
15

-1
-1
-1
-1

-1
-1
-1
-1

n-
n-
n-
n-

ay
ay
ay
ay

p
p
p
p

Ja
Ja
Ja
Ja

Se
Se
Se
Se

M
M
M
M

CDS 5 years Brazil Spread over the Treasury Source: National Treasury

Source: Bloomberg
Outstanding debt
There was
FPD outstanding volume grew by 8.9% an increase
EFPD issuances totaled BRL 7.8 billion. However, due to ma- compared to the previous year. The in the share
turities and buybacks, external debt net redemption was of main explanation for this increase was of floating-
BRL 2.8 billion in 2018. the interest accrual of BRL 342.7 billion, rate bonds
as shown in Table 5. In the case of the in the
Under the early redemption external debt bonds program external public debt, the interest ac- public debt
(buyback), implemented in January 2006, there were already crual includes the effect of exchange composition
bought back USD 123.7 million of dollar-denominated bonds rate fluctuations.
in face value, a volume equivalent to USD 148.5 million in
financial value. Through the buyback program, the Treasury Tabela 5 – Variation factors for FPD -BRL billion
takes off the market less efficient bonds, with smaller liquidi- Outstanding Change Drivers
ty and attractive prices to the Republic. Indicators
change Net Accured
2017 2018 (a-b+c) Issuances Redemptions Issuances Interest
(a) (b)
(a-b) (c)
2.3. FPD indicators and risk management
FPD 3.559.3 3.877.1 317.8 664.7 687.9 -24.9 342.7
DFPD 3.435.5 3.728.9 293.4 656.9 679.0* -22.1 315.5
The FPD indicators ended 2018 within the reference limits
EFPD 123.8 148.2 24.4 7.8 10.6 -2.8 27.2
defined in the 2018 Borrowing Plan, considering the adjust-
* Includes portfolio exchange between market and Central Bank worth BRL 1.732.8
ment on the share of floating rate bonds limits contained in million, as explained in Table 2.9 of the Monthly Debt Report
the revision of the ABP in September, as presented in Table 3. Source: National Treasury
2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 20

Composition of federal public debt and market risk The current fiscal imbalance scenario poses to debt management
the challenge of dealing with an increasing outstanding debt
In the composition of FPD, a relevant change was the increa- volume and the deterioration of its composition, which results
se of 4.0 percentage points in the share of floating rate bonds in greater market risk to the FPD profile, due to increased
relative to the end of 2017, from 31.5% to 35.5%. In 2018, exposure to short-term interest fluctuations.
the average issuance of floating rate bonds was higher, being
partially offset by a higher amount of redemptions compa- The strategy of keeping a domestic debt rollover close to
red to 2017, which smoothened the increase in the share of 100%, in a low floating-rate bonds maturity volumes period
outstanding debt. combined with the risk aversion environment that prevailed
throughout the year led to the increase in the share of floa-
On the other hand, the share of fixed-rate and inflation-linked ting-rate bonds relative to the previous years.
bonds fell from 35.3% to 33.0% and 29.6% to 27.5% respec-
tively, both results derived from a proportion of issuances The increase in floating-rate bonds issuances takes place in
lower than maturities (Figure 10 above) and of the increase a context of fiscal primary deficits, once the risk premiums

Beach in Florianópolis, Santa Catarina

in floating rate issuances. for these bonds tend to remain stable at moments of greater
volatility and risk aversion. Thus, in the short term, such
Figure 12 – FPD composition according to bond category bonds have cost advantages for the issuer, especially in an
environment in which the benchmark interest rate is close to
100% Exchenge rate
its historical minimum. Another benefit of the floating rate
90%

80%
Floating rate
bonds is their average maturity (around 6 years), avoiding
70% the concentration of debt maturities in the short term and
60% Inflation Linked therefore presenting itself as an alternative to short-term
50%
fixed-rate bonds.
40%

30%

20% Fixed Rate Even in the face of these changes in the debt composition, the
10% National Treasury continues to pursue its long-term guideline
00%
of gradually replacing floating-rate bonds by fixed-rate and
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

inflation-linked ones, as a strategy to mitigate market risk.

Source: National Treasury; as of 31 December 2018. However, the progress of this guideline depends on Brazil's
economic recovery and fiscal consolidation.
2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 21

Maturity profile and rollover risk (duration)1 . FPD average life statistics are available at: http://
The market risk refers www.tesouro.fazenda.gov.br/en/web/stn/key-debt-figures.
to the possibility of The FPD maturity profile relates directly to its rollover risk. To
an increase in the evaluate this risk the National Treasury takes as a reference Figure 13 – FPD maturity profile
outstanding debt the share of the debt maturing in twelve months, which
due to fluctuations in represents the proportion of the debt maturing in the short
7 Average Maturity
interest, exchange rate term. An additional rollover risk indicator is the average 6.6 6.4
6
and inflation that may maturity, which measures the average remaining time for 5.9
5.7
5.5
affect the costs of debt payments to mature, weighted by the present values of
5

Years
4.6
public bonds principal and interest payments flows. The risk is considered 4
4.6 4.5
4.3
4.1
higher as higher is the first indicator and as lower is the latter. 3
3.5
In 2018, both risk measures presented only minor changes. 2.8 2.8
2

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018
The aforementioned changes in debt profile influence Average maturity Average Life
maturity profile indicators. In particular, the average maturity
Share of debt maturing in 12 months
is influenced by the lower participation of inflation-linked 45%
39.3%
bonds, typically long-term instruments, and the reduction of 40%

the share of longer fixed-rate bonds (NTN-F). The share of 35% 32.7%

30%
debt maturing in 12 months has been stable at below 20% 25%
The rollover risk refers 25%
of FPD, which is a historically low value for Brazil. This result 20% 16.7%
19.6%
to the possibility of 24.0%
16.3%
was favored by the strategy adopted by the National Treasury 15% 16.8%
the Treasury to face 10.7%
to reduce the issuance of very short-term (up to one year) 10% 8.3% 9.2%
adverse conditions
fixed-rate bonds. From this perspective, issuances of LFTs are 5%
when refinancing the

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018
preferable to shorter maturity bonds.
maturing debt, or, on FPD in % GDP in %

extreme cases, even

In addition to the average maturity, the Treasury regularly
the failure of raising
publishes the average life or average time to maturity for the
funds to honor its
FPD. This indicator is useful for international comparisons,
liabilities
since many countries use this statistic to calculate the maturity
of their debts instead of the concept of average maturity
Source: National Treasury
1 
However, average life is an indicator less efficient than average maturity, since it does not
consider coupon payments nor calculates payments by their present value. Such drawbacks,
which are the reason the Treasury gives less emphasis to this indicator on FPD statistics.
explain why average life values are usually well above average maturity. Despite these
limitations, most countries adopt an indicator similar to the average life in their maturity
profile statistics. Therefore, direct cross-country comparisons between the measures
adopted to stablish reference FPD ranges are inaccurate.
2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 22

As part of the debt risk management policy, the debt management holds a liquidity reserve (cushion) at the National Treasury
to prepare for periods of higher maturity volumes. The Treasury has kept this reserve above the equivalent of six months of
domestic debt principal and interest payments. This allows the Treasury, in periods of high market volatility, like those expe-
rienced in May and June of 2018, to stop new issuances for a period as long as the reserve permits covering debt maturities,
which avoids pressuring debt costs in periods of adverse market conditions.

The public debt cost DFPD average cost

accrued in 12 months

Maceió, Alagoas
The cycle of monetary policy easing, initiated in late 2016 and extended until the beginning of 2018, had an impact on the cost reached the historical
of debt, which kept a downward trend in 2018, as can be seen in Figure 14. The 12-month average cost of the outstanding low
DFPD reached the lowest value of the historical time series in December 2018. The average external debt cost was higher
than the average domestic debt cost due to the exchange-rate changes effect over FX liabilities.

Figure 14 – average FPD cost (12-month accrued)

18 70 18
60
The average issuance
15 50 15
40
cost of debt reached
30
12
the lowest value of the
12
(% per year)
FPD, DFPD, Selic

EFPD

20 historical time series

(% per year)

10
9 9.86 0 9 9.37143

-10
6 -20 6

Dec/13
Dec/06

Dec/07

Dec/08

Dec/09

Dec/10

Dec/11

Dec/12

Dec/14

Dec/15

Dec/16

Dec/17

Dec/18
Dec-06

Dec-07

Dec-08

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18
Dec-09

DPF Selic DPMFi DPFe DPFD Fixed rate Floating rate Inflation Linked

Source: National Treasury

 waterfalls of Iguaçu
2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 23

The average domestic debt cost of issuance, which measures 2.4 Investors base
market access conditions over the past 12 months, has
decreased even further, a two-percentage-point drop. The The diversification of the investors base is one of the Treasury
indicator closed the year at 7.64%, the historical series lowest financing strategy guidelines, since investors with different
The DFPD investor
mark. The analysis of the debt cost segregated by type of bond risk profiles and investment horizons contribute to a more
base is diverse, with
indexer shows that the decline to levels close to or lower than efficient debt management, by minimizing the effects of the
mutual and pension
the historical low is verified for all the bonds’ categories. behavior of a single type of investor on prices and rates of
funds representing
public bonds. Investors base diversification also increases
the groups with the
The average cost of issuance reflects the debt funding rates in market liquidity, contributing to lower volatility.
largest participation
more recent issuances and thus this indicator tends to follow
percentage.
more closely the dynamic of the reference interest rate. On In this sense, one of the FPD strengths is the presence of
the other hand, the average cost of the outstanding debt a broad and diversified investors base, especially in the
tends to be more stable and thus takes longer to respond domestic debt. In 2018, the bondholders profile remained
to short-term changes in the interest rate parameters. This close to that of the previous year. There was an increase in
is because the cost of the outstanding debt reflects all the the participation of mutual funds, which became the largest
bonds issuances, including those executed in a more distant investor category, and financial institutions, while pension
past and that have not yet matured. funds (the second largest group), government and insurance
companies reduced marginally their participation.
Figure 15 – DFPD cost of issuance (12-month accrued rate,
% Y.o.Y.)
18
Figure 16 –DFPD investors base performance (% of DFPD)

0.3
15 26.9%
25.2% 25.5%
25.0%
0.25
22.3% 22.7%

12 0.2

0.15
9 12.1%
11.2%
0.1
7.64
6 0.05 4.5%
4.2%
4.8%
4.1%
jun/11

jun/12

jun/14

jun/15

jun/16

jun/17

jun/18
dec/10

dec/11

dec/12

dec/14

dec/15

dec/16

dec/17

dec/18
dec/13
Jun-13

0
Mutual Funds Pension Funds Financial Non-residents Government Insurance
DPFD Fixed Rate Floating Rate Inflation Linked Institutions Companies
Dec/17 Dec/18

Source: National Treasury Source: National Treasury and Selic

2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 24

Regarding non-residents, despite the reduction in their relati- Figure 18 – Participation of investors by type of bond
ve participation, the outstanding debt held by the group was 6% 5% 6% 2%
kept stable in 2018 (Figure 17), interrupting the downward 5% 5%
4%
6%
19% 15% 9% 12%
trajectory observed over the past two years. This movement
is indicative of increased confidence in the country. In this 20%
46%
53%
sense, a greater inflow of investments from this group is ex- 47% 13%
2%
pected as the country moves forward with structural refor-
40% 21% 7%
ms. 23%
11% 15%

LFT LTN NTN-B NTN-F

Figure 17 – Variation in non-residents’ public bonds Financial Institutions Mutual Funds Non-residents
Pension Funds Government Insurance Companies
portfolio (BRL billion) Others
(R$ bilhões) 80.4 90.9

63.6
Source: National Treasury and Selic

2.1
The composition of the portfolio of the main groups of in-
-11.5 vestors and the maturity breakdown are shown in Figure 19.
More than 90% of the non-residents' investments are in fi-
xed-rate bonds and 41% of the pension funds portfolio has
-70.0
more than five-year maturity.
2013 2014 2015 2016 2017 2018

Source: National Treasury and Selic

Analyzing the participation of bondholders by bond type,

the participation of pension funds in NTN-Bs stands out. Of
the total outstanding NTN-Bs, 46% is held by this group. The
other highlights are: 53% of NTN-Fs in the market are held
by non-residents, 40% of the LTNs are in the portfolio of fi-
nancial institutions and 47% of the outstanding LFTs are with
mutual funds.
2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 25

Monte Roraima
Figure 19 – Federal bonds portfolio by investors group

Composition by bond type Composition by maturity

10%

4% 17% 22% 16% 21%
38%
28%
42%
32%
39% 41% 36%
31%
27% 27%
64%
19% 32% 33%
26%
91% 23% 23% 29%
29%
36% 32%
48% 32%
36%
53% 14% 58%
31% 29%
43% 38% 30%
21% 25%
21% 6% 11% 14%
12% 5%
4%
Financial Pension Funds Mutual Funds Non-residents Government Insurance Others
Financial Pension Funds Mutual Funds Non-residents Government Insurance Others Institutions Companies
Institutions Companies
Up to 1 year From 1 to 3 years From 3 to 5 years After 5 years
Inflation-Linked Fixed Rate Floating Rate Others

Source: National Treasury and Selic

2.5 Guarantees granted by the Federal Government and assets against subnational entities

The guarantees granted by the Federal Government to credit operations of subnational entities, banks and state-owned com-
panies, have gained importance in public debt control due to the growth in the outstanding volume of guaranteed contracts, as
well as the recurrence of honor of guarantees by the Federal Government. In 2018 the outstanding balance of credit operations
guarantees granted by the National Treasury amounted BRL 258.2 billion.

Tabela 6 – Total outstanding guaranteed credit operations and honored payments

2012 2013 2014 2015 2016 2017 2018
Intern Ensurances 22.6 52.7 80.6 112.3 111.1 111.5 114.3
States 13.2 39.9 61.9 81.8 81.3 84.7 91.4
Others 9.4 12.8 18.7 30.5 29.8 26.8 22.9
Extern Ensurances 48.6 56.1 70.2 110.6 103.8 121.8 143.9
States 29.2 35.7 47.7 77.8 75.5 91.2 107.7
Others 19.4 20.4 22.5 32.8 28.3 30.6 36.3
Total of Ensurances 71.2 108.8 150.8 222.9 214.9 233.3 258.2
Total of honors of Ensurances 0.0 0.0 0.0 0.0 2.4 4.1 4.8
Source: National Treasury
2 Outcomes Achieved Federal Public Debt/Annual Report/2018 - National Treasury 26

Throughout the year, the amount of federal government payments of guaranteed liabilities originally incurred by states and
municipalities reached BRL 4.8 billion, which represented a growth of 19% compared to 2017 (BRL 4.1 billion). Guaranteed debt
payments related to the state of Rio de Janeiro amounted BRL 4.0 billion (84%) of the total paid by the Federal Government in
2018.

The counter-guarantees recovery related to guaranteed debt honored by the Federal government has been operating regularly,
except those related to the state of Rio de Janeiro, which is under the Fiscal Recovery Regime, established by Law No. 159/2017.
Serra da Mantiqueira

The Treasury releases every four months, a report on guaranteed credit operations in which it details the guaranteed debt situ-
ation of all the states, as well as an overview of this contingent liability to which the federal government is exposed. The report
is available at the link: https://www.tesouro.fazenda.gov.br/pt/-/relatorios-garantias-e-contratacoes-diretas
 Federal Public Debt/Annual Report/2018 - National Treasury 27

Innovations and
3
This chapter presents the topics in development by the pu-

Topics in blic debt management, beyond the financing strategy and the
results achieved for the main FPD indicators. In this ADR we

Development
highlight the recent developments on the fixed income Ex-

Xingó Canions, San Francisco

change-Traded Fund (ETF) launch supported by the National
Treasury, the operation of the FPD dealers system, initiatives
in the Tesouro Direto retail bonds program and efforts made
throughout 2018 to improve the National Treasury communi-
cation with the society, among other topics.

Fixed income Exchange-Traded Fund (ETF)

The National Treasury encouraged the launching of a fixed in-

come exchange traded fund (ETF) backed-up by public bonds,
with the purpose of strengthening and promoting the develop-
ment of the Brazilian capital market. ETFs are investment funds
referenced in market indices, which, unlike traditional funds,
have their shares traded like common stock on a stock exchan-
ge or on over-the-counter market. With this intent, the Trea-
sury and the World Bank initiated in 2013 the Issuer-Driven ETF
(I-D ETF) project, or ETF supported by the public bonds’ issuer.

The project went through several stages and, in September

2018, the National Treasury finalized the selection process for
the financial institution in charge of managing the ETF suppor-
ted by the National Treasury, as regulated by Article 3º of law
10.179 of 2001.

Itaú Asset Management was the selected financial institution

and, according to the selection notice, will have an eighte-
3 Innovations and Topics in Development Federal Public Debt/Annual Report/2018 - National Treasury 28

en-month1 deadline to launch the fund on the market. The comprise virtually all the bonds issued by the Treasury on the domestic market. The IMA family
administration fee to be charged from ID ETF investors will indices act as an alternative to the CDI, the parameter still mostly used by the fund industry in
be of 0.25% Y.o.Y. maximum. The fee value meets the project the country and whose yield is directly linked to the very short-term interest rate.
objective of providing a new and affordable savings instru-
ment for individual and institutional investors. In 2018, the fixed income indices fund industry grew substantially and currently manages BRL
150 billion in equity, representing about 135 funds that directly refer to these indices.
The National Treasury supported the project with the aim of
developing the long-term bonds market and contributing to Figure 20 – Fixed income indices yield
the process of de-linking the economy from overnight inte-
rest rates. The ETF also helps promoting price dissemination, 500%
Accumulated Profitability of the Public bonds Indices Use of the IMA index by Investment Funds
(2005 - 2018) 250 410
since trading shares in the stock exchange environment rai- 450% 399
400

Net Worth (BRL Billions)

400% 200 390
ses the demand for intraday price references for bonds. The 380

Quantity of Funds
350%
370
reference index established for the ID ETF shall be IMA-B.6 300%
250%
150 359
354 360
350
100 337 340
200%
150% 330
Detailed information about the ETF ID can be obtained in the 100%
50 320
121.7 161.8 196.9 225.9 310
website: https://www.tesouro.fazenda.gov.br/-/etf-apoiado- 50% 0 300
0% 2015 2016 2017 2018
-pelo-tesouro-nacional. (only in Portuguese). CDI IRFM IMA-B 5 IMA-B IMA-B 5+ Net Worth (BRL Billions) Qty of funds

Performance of public bonds indices
The choice of investors for fixed-rate and inflation-linked lon-
g-term bonds tends to be rewarded with higher profitability
in the medium and long terms, as illustrated in Graph 18 whi-
ch presents IMA indices yields.
Each of these indices follows the yield of a theoretical portfo-
lio composed of federal government bonds, which together
1 
From September 2018
6
Anbima Market Index - IMA - represents a family of indices that follow the rate of a
theoretical portfolio formed by virtually all the federal government bonds on the market.
The IRF-M, one of the IMA family indices, is associated with the fixed-rate bonds, while the
Source: AMBIMA
Dealers system and secondary market for bonds
The National Treasury accredits financial institutions with the aim of promoting the develo-
pment of primary and secondary public bonds markets. Known as dealers, these institutions
operate both in the primary issuances of federal government bonds, in which the Treasury
requires from them a minimum participation in public auctions3; as well as in the secondary
market for these bonds through the distribution and market development, contributing to a
more efficient monitoring of the secondary market segment and of the developments of the
industry in which these institutions operate.
These requirements, as well as their respective counterparts, are defined in National Treasury Ordinance No 90 of February 7, 2018, which
3 

IMA-B index is composed exclusively of inflation-linked bonds. currently guides the rules of the system.
 Canoa Quebrada, Ceará
3 Innovations and Topics in Development Federal Public Debt/Annual Report/2018 - National Treasury 29

The data in Figure 21 illustrates the growth trend of the volume traded in the secondary market Figure 22 – Secondary market trade on electronic
since Central Bank and National Treasury dealers systems split up in 2015. The average daily platforms
volume, which was of approximately BRL 12 billion in January 2015, reached BRL 30 billion in
December 2018, considering the extra-group concept (negotiations between institutions in ETPs Monthly Vol and Secondary Market Share
R$80 12%
different financial corporations). In particular, in 2018 there was an increase in the volume tra- R$70
10%
ded relative to the respective outstanding bonds volume, an important liquidity measure. R$60
8%
R$50
R$40 6%

BRL Billion
Figure 21 – Volumes traded on the public bonds’ secondary market R$30
4%
Average Daily Trading Volume R$20
40 Average of the daily capacity in relation to the outsanding
2%
R$10
35 1.46%
R$- 0%
30 1.29%
BRL Billion

Oc 5

Oc 6

Oc 7

Oc 8
15

15

16

16

17

17

18

18
Ap 5

Ap 6

Ap 7

Ap 8
l/1

l/1

l/1

l/1
1

1
25

t/

t/

t/

t/
r/

r/

r/

r/
n/

n/

n/

n/
0.99%

Ju

Ju

Ju

Ju
0.98% 0.97%

Ja

Ja

Ja

Ja
0.91%
20
ETPs Financial Volume Secondary Market Share
15
0.46% 0.48%
10
15

16

17

18
7

8
5

17

18
15

16

18
15

16

17

l/1

l/1
l/1

l/1

Source: National Treasury

r/

r/

r/

r/
t/

t/
t/

t/

n/
n/

n/

n/

ju

ju
ju

ju
ab

ab

ab

ab
ou

ou
ou

ou

ja
ja

ja

ja

Average Daily Trading Volume 12-Month Moving Averages

LFT LTN/NTN-F NTN-C/NTN-B TOTAL

2017 2018 New regulation of debt securities - Decree No 9.292 of Fe-
Source: National Treasury bruary 23, 2018

The Treasury also seeks to encourage through its dealers system, in order to increase liquidi- The Brazilian Debt Management Office – SUDIP (acronym in
ty and price transparency, the segment of electronic trading platforms for public bonds. The Portuguese) opened, throughout 2017, a debate about the
progress on this front has been positive in recent years, rising from about BRL 5 billion volume need to update the legislation governing Treasury-issued
traded on electronic platforms in January 2015 to about BRL 60 billion in December 2018. bonds. This discussion produced subsidies for the publication
of Decree No. 9,292 of February 23, 2018, which establishes
the characteristics of the domestic public bonds and provides
other measures.

The new decree revoked Decree No. 3.859, of July 4, 2001,

which was legally and operationally outdated, since it still
mentioned bonds that were no longer outstanding or which
issuance was no longer legally authorized. In addition, Decree
3 Innovations and Topics in Development
No. 3.859 mentioned bonds that had been designed to meet
a specific purpose and that no longer held the objective that
motivated their issuance.
In the context of the current bonds issuance dynamic, the
new Decree maintained the bonds currently offered in the
competitive auctions (public bonds auctions and retail pro-
gram issuance), which are, the floating-rate bonds Letras Fi-
nanceiras do Tesouro – LFT, the short-term fixed-rate bonds
Letras do Tesouro Nacional – LTN, the inflation-linked bonds
Notas do Tesouro Nacional, série B – NTN-B and long-term
fixed-rate bonds Notas do Tesouro Nacional, série F – NTN-F,
as well as those used in direct issuances, such as the Notas
do Tesouro Nacional, Série I –NTN-I, used in the Programme
for Financing Exports (PROEX - acronym in Portuguese), and
the Certificados Financeiros do Tesouro, série E – CFT-E, used
in the FIES (acronym in Portuguese), a program for funding
student loans.
To adapt the regulation to the current reality of the legislation
and to debt profile, references to bonds that have lost the
objective that motivated their issuance, and that are no lon-
ger outstanding, such as the Letras Financeiras do Tesouro,
Series A and B – LFT-A e LFT-B, the Notas do Tesouro Nacio-
nal, Series M – NTN-M, and the Notas do Tesouro Nacional,
Series R, Subseries 2 – NTN-R2 were removed from the text.
In addition, to assure that the new decree covered all the
bonds currently issued domestically by the Treasury, it inclu-
ded the TDA bonds, used in the Agrarian Reform, as well as
the CVS, issued in the securitization of debts arising from the
Federal Public Debt/Annual Report/2018 - National Treasury 30
FCVS fund. Such securities were not previously included in
the revoked Decree.
In this sense, the publication of the Decree No. 9.292/2018
Foz do Iguaçu
represented an instrument of public bonds market improve-
ment by producing an important update of the legislation,
which was the product of a deep work of revision of the re-
gulation in force on the matter and of a wide-ranging discus-
sion about the current FPD context.
Working Group - FPD outstanding volume statistics
In March 2018 the Federal Public Debt (FPD) Outstanding Vo-
lume Statistics Working Group was created with the objecti-
ve of standardizing existing methodologies for the calculation
of the FPD outstanding volume. The implementation of the
recommendations identified by the group will improve the
harmonization between accounting records and the statisti-
cal reports, which will promote transparency gains, enhance
information quality, and optimize communication with the
society.
The Working Group, composed of representatives of the Debt
Management Office and of the Public Accounting Undersecre-
tariat, after completing the studies, simulations and impact
assessments stages, prepared and presented, in December
2018, a final report and had its recommendations approved
by the National Treasury Secretary. The next step will lead
to an adaptation project in the Integrated Debt System (SID,
acronym in Portuguese) as a requirement for the implemen-
3

Serra da Mantiqueira
Innovations and Topics in Development Federal Public Debt/Annual Report/2018 - National Treasury 31

tation of the suggested improvements. These actions will be by borrowers and creditors type. With this data breakdown,
undertaken starting in 2019. guaranteed debt management has reached a differentiated
level, with reports and balances that can be consulted in real
Guarantees Granted by the Federal Government in Credit time, updated according to the best information available at
Operations - SID in 2018 the moment, besides the possibility of forecasting outstan-
ding guaranteed debt and payment flows.
Given the increasing importance that the guarantees gran-
ted by the Treasury have been taking since mid-2010s, the The report is available through the link: https://www.tesou-
reinforcement of a system that organizes and processes in- ro.fazenda.gov.br/documents/10180/0/RQG+2+QUADRIMES-
formation correctly and efficiently has become essential. In TRE/fb82faf3-7bde-4dd2-ad21-f9b93a408c92.
this sense, in early 2017, the National Treasury started the
production of the guarantees’ module in the Integrated Debt Tesouro Direto Retail Program
System - SID. As of July 2017, all the guaranteed external debt
contracts were already registered with SID, with updated fi- Reinforcing the program's digital concept, The National Trea-
nancial planning and amortization schedules. sury launched, in March 2018, the Tesouro Direto (TD) retail
program app. With a modern design, the app provides the
The next step was the development of reports, calculation main tools already available in the Tesouro Direto website,
routines and monitoring of the contracts of guaranteed do- so that the investor can make fo-
mestic debt contracts, which was completed in the first quar- recasts, operations and monitor
ter of 2018. The National Treasury was assisted, during this investment performance effi-
process, with regular updating of information by creditors ciently without the need to chan-
and borrowers. In addition, a module of arrears in guarante- ge from one platform to another,
ed contracts and guaranteed debt honored by the Treasury, directly from the mobile phone.
concluding the transition of all processes involving the con-
trol of guaranteed debt to SID. The program went through chan-
ges regarding investments’ ti-
Also, in 2018, the new Guarantees Report was structured, meframe for settlement. In ear-
including federal government exposure to the outstanding ly February 2018, the time for
guaranteed debts, as well as new statistical and financial data, settlement of TD investments
such as the share of maturing guaranteed debt, the ATM (ave- was reduced from 2 days to 1
rage life) and the composition, classified by bond type and workday (for transactions on
3 Innovations and Topics in Development
working days from 0h00
a.m. to 6h00 p.m.) and
from 3 days to 2 working
days (for transactions from
6h00 p.m. to 0h00 a.m.,
weekends or holidays). The
change converges to best
practices adopted by the
financial industry and me-
ans greater security and
quickness for the investor.
However, the greatest innovation for the program in 2018
was announced in December. From 2019 onwards, the ad-
ministration fee charged by B3 will be lower, going from
0.30% per year to 0.25% per year. Also, in 2018, the zero ad-
ministration fee policy was disseminated among the finan-
cial institutions (banks and brokers) that offer the Tesouro
Direto. With lower costs, the net return for the investor on
TD bonds increases.
Strengthening of the program’s democratization process was
the main highlight on the TD statistics in 2018. There was an
increase of 220 thousand active investors (those who cur-
rently have investments in the program) totaling 786 thou-
sand investors with balance, a number 39% higher than in
2017. In the same period, the share of investment operations
up to BRL 1.0 thousand rose from 56.8% to 63.1%. These re-
sults show greater accessibility to public bonds and the inte-
gration of citizens into TD through financial education.
Federal Public Debt/Annual Report/2018 - National Treasury 32
Serra da Mantiqueira
Communication efforts with society
In the National Treasury strategic planning, communication
has been defined as an element to strengthen the institu-
tions’ image, improve transparency and consolidate the Tre-
asury as a source of information and accounting data of the
public sector in Brazil. Based on this guideline, the Treasury
has been reinforcing its interaction with society through new
channels, formats and language levels in its disclosures. Some
of the following initiatives have been developed in the debt
management context.
New series of vídeos on the golden rule
The context of primary deficits in federal government ac-
counts prevailing since 2014 sparked the debate on the res-
triction imposed by the golden rule (article 167, item III, of
the 1988 Federal Constitution). According to this rule, go-
vernment credit operations cannot exceed capital expendi-
tures each year. To clarify the topic, the National Treasury
launched, in cooperation with the Escola de Administração
Fazendária (ESAF), a series of five short videos, with a simple
and educational language approaching frequent questions
regarding this important fiscal rule: Getting to know the gol-
den rule, Golden rule and capital expenditures, How Bra-
zil adopts the golden rule, Golden rule and public accounts,
Golden rule and budget rigidity. The videos were published
in the main social media and echoed further helped by the
policy of using the Treasury Facebook profile as an active
and official communication channel.
 3 Innovations and Topics in Development Federal Public Debt/Annual Report/2018 - National Treasury 33

In addition to the video series, the National Treasury pu-

blished in 2018 two other reports (one in May and other
in November) that interpret the main public accounts un-
folding consequences for the golden rule and the need for
Rio de Janeiro

future adjustments. The golden rule accomplishment can be

followed-up through the monthly National Treasury Fiscal
Balance reports.

Public debt projections report

One of the consequences of recurrent federal government

primary deficits is increasing debt burden. In this context,
the Treasury launched the first report on public debt projec-
tions, which will be published every four months, as part of
the efforts to consolidate its role as reference in debt sustai-
nability analysis and to assist fiscal diagnosis and the expec-
tations formation, in increasing transparency and improving
communication with society.

This report is available in the following link: http://www.te-

souro.fazenda.gov.br/pt/-/relatorio-quadrimestral-de-proje-
coes-da-divida-publica. (only in Portuguese)

Quarterly report "Inside Brazilian debt numbers”

Also, with the intention of increasing transparency in debt

analysis, the Treasury consolidated the publication of the re-
port “Inside Brazilian debt numbers”, launched in 2017 on a
quarterly basis. This publication presents to the population
and economic agents, in plain language, the figures, terms
and concepts involved in the FPD management.

This report is available at the following link in the National

Treasury website: https://www.tesouro.fazenda.gov.br/pt/-/
inside-brazilian-debt-numbers
 Federal Public Debt/Annual Report/2018 - National Treasury 34

Final
4

Chapada Diamantina, Bahia, Brazil

Remarks

The country faced several challenges throughout 2018 both in the domestic scenario, where
there were uncertainties inherent to the electoral cycle, as well as in the international scena-
rio. In a market marked by volatility periods, the Treasury has adjusted its strategy to mini-
mize pressures, through extraordinary actions and by expanding its floating-rate bond (LFT)
issuances. The decrease in the fixed-rate (NTN-F) and inflation-linked (NTN-B) bonds issuan-
ces affected some indicators such as, average maturity and debt composition. However, the
continuity of a low inflation scenario and the favourable monetary policy cycle have allowed
FPD's cost indicators reduction in the short term, which is favourable to public indebtedness.

In this ADR edition, the National Treasury presented innovations that have cooperated not
only for the improvement of FPD management, but also for the increase of transparency on
this topic to society. Thus, the Treasury contributes to better substantiate debates and related
public policy decisions.