Source: Brazilian Government Data
The IMF calculates that Brazil’s gross debt to GDP ratio was 84% at the end of 2017. At the same time, the country’s net debt to GDP ratio was 51.6%. Gross debt counts just all of the money that the country owes. The net debt figure deducts all of the government-held assets for that figure. The big difference between these two figures shoes that the Brazilian government could sell off a lot of its assets and pay off a big chunk of its national debt.
The IMF only counts general government debt and not the debts of state-owned enterprises. The Republic of Brazil has a state-owned oil company, which is a source of national pride and also a big source of income for the government. However, the debts of this company, Petrobras, are not included in the national debt figures.
The debts and payments made by Petrobras have been the source of political turmoil in recent years, resulting in the conviction of one former president and the ongoing trial of another. The financial scandal that has emerged about the manipulation of state-owned enterprises shows that Brazilian politicians have become adept at hiding government debt and using public assets for personal gain.
Emerging revelations about the manipulation of state government budgets are also scaring away international investors from Brazil. These problems, together with the increasingly unstable political landscape, mean that the Brazilian government has to offer high interest rate in order to attract buyers to its securities.
Investors look to the credit rating of a country when they consider investing in it. This consideration extends to all types of investments, but it is particularly cogent for those investing in government securities. The credit rating allocated to Brazil by the major agencies is shown in the table below.
Agency Overseas currency Domestic currency Outlook DBRS BB (low) BB (low) Stable Standard & Poor's BB- BB- Stable Fitch BB- BB- Stable Moody's Ba2 Ba2 Stable JCR BBB- BBB Stable R&I BBB- Negative
These ratings are not good and do not compare well with Brazil’s rivals. For example, Mexico has an A3 credit rating. This means that international investors looking to buy Latin American government securities are more likely to buy Mexican bond than those issued by the government of Brazil. That means that Brazil has to work a little harder in order to raise debt.
The Finance Ministry of the Federal government of Brazil is responsible for the national debt and answerable to the country’s parliament, which is based in Brazilia, the national capitol.
A division of the Finance Ministry, which is called Tesouro Nacional is directly responsible for raising debt on behalf of the government.
The Banco Nacional de Desenvolvimento Econômico e Social (BNDES) is one of the world’s largest state-owned development banks and it has become a great source of income for the government. It’s profit payments into the treasury reduce the need for the government to raise debt. By the end of 2018, these payment will have reduced the national debt by 4.8% of GDP. Despite this strong source of income, the National Treasury projects that the country’s debt will continue to rise.
You will note from the above graph that the National Treasury calculated the country’s general government debt to be 74% of GDP at the end of 2017, when the IMF calculated that figure at 84%.
The main source of finance for the states of Brazil and local government comes from the National Treasury. However, the are also allowed to raise their own debt.
A recession in Brazil from late 2014 through to early 201 had a strong impact on the finances of state and local governments. In response to this crisi, the National Treasury rescheduled loan terms on state debt, reducing interest due per year and extending loan periods by 20 years.
The debt instruments that the National Treasury sells can be categorized into two divisions:
Short-term debt securities are the LTN, which are Treasury bills. These have maturities of less than a year and are issued to bridge the mismatch between the government’s regular expenses and the irregular pace of its income receipts. The LTNs do not pay any interest, but they are sold at a discount and redeemed at full face value. The NTN-S Series is another short-term government security (described below).
The majority of the long-term government securities that are currently in circulation offer a floating rate. The interest rate used for these bonds is called the Selic Rate. The National Treasury has instituted a policy to reduce the dominance of floating rate devices and enhance the profile of fixed-rate bonds.
The Brazilian government offers a confusing range of securities. However, they fall into the following broad categories:
The pie chart below shows the current proportions of each type of bond in circulation.
There are a number of different floating rate bonds, which pay interest at the Selic Rate, or that rate plus a margin. These include the LFT-A bond which can have a maturity of up to 15 years and gets repaid in monthly installments over its lifetime. The LFT-B with interest at the Selic Rate. It pays out all of its interest on the maturity date by adding that interest to the capital every year. These bonds can have a maturity of up to 15 years.
The National Treasury Note (NTN) is an index-linked bond. The capital value of these bonds is increased each year on a basis that is linked to a different index according to the bond type.
The NTN-A Series includes a large number of variations that are all linked to the value of the US dollar. Some versions of this bond have a fixed interest rate, while other have a floating rate. Although the NTN-A Series is no longer being issued by the government, there are still many of these bonds circulating on the secondary market.
The NTN-B Series is still issued by the government and can have maturity dates of more than one year. The capital amount rises each year in line with the Extended National Consumer Price Index (IPCA). These bonds have a fixed rate of interest for their lifetimes. Interest is paid in two installments per year.
The NTN-C Series is linked to the General Market Price Index (IGP-M). The bond pays a fixed interest rate for its lifetime, which can be a maturity term of any length over one year. Interest payments are made in two installments per year.
The NTN-D Series is linked to the US Dollar exchange rate and pays a fixed rate of interest in two installments per year. The maturities of these bonds are all longer than one year.
The NTN-F Series and NTN-H Series (there is no NTN-E Series or NTN-G Series) are both sold at a discount and pay a fixed rate of interest in two installments per year. The maturity dates of these bonds are all longer than one year.
The NTN-I Series, the NTN-M Series, and the NTN-P Series are no longer being issued and they are not transferable, so you won’t encounter them on the secondary market.
The NTN-R2 Series is linked to the US Dollar exchange rate, pays a fixed interest rate of 12% each year on the remaining capital amount. The bond has a 10 year maturity and is repaid in 10 installments, ech paid on the anniversary of the bond.
The NTN-S Series is a short-term financing instrument lasting for a minimum of one month. The note is both discounted and it also pays interest.
The NTN-U Series can have a maturity date of between 1 and 15 years. This bond is redeemed in monthly installments. It’s capital value is linked to the Long Term Interest Rate (TJLP) and pays a fixed interest rate of 6.53% applied to the outstanding amount over its lifetime.
The chart below shows a breakdown of the categories of holders of Brazil’s national debt.
The overseas participation in the market of 12.6% is relatively small for such a significant emerging market as Brazil.
What facts should you know about Brazil’s national debt?