Interest curve does not reflect the country’s situation and the Treasury will not endorse speculation, says secretary – 02/14/2023 – Market

The National Treasury is not issuing the volume of public debt securities it could because it is not willing to accept the rates requested by the market, said this Tuesday (14) the Secretary of the Treasury, Rogério Ceron, adding that the current yield curve does not reflect the fundamentals of the Brazilian economy.

“I think the country has an economic structure, even a fiscal one, which is not structurally compatible with the pricing we are observing today in our yield curve,” he said in an interview with Reuters.

“No one wants to be forcing the market, but you don’t have to simply passively change, even more so in times of stress,” he added.

Ceron highlighted that the Treasury’s liquidity cushion, which ended 2022 at BRL 1.176 trillion, serves precisely to allow the government to refrain from acting when it identifies speculative movements or excessive volatility.

Recently, the futures interest curve gained a slope amid criticism from President Luiz Inácio Lula da Silva regarding the basic interest rate, maintained by the Central Bank at 13.75% per year, the maximum in six years. It also reflected the president’s complaints about the inflation targets, seen by him as too low, under the justification that the targets for the evolution of prices impose excessive sacrifice on the economy.

Ceron said that the cost of long-term debt is higher in relation to the average of previous periods, but he pointed out that this has been observed since the approval, last year, of measures to increase spending before the elections by the government of the former president. Jair Bolsonaro.

“Our long-term interest is 1.5 percentage points above what it usually was, our short-term interest is also under pressure, it is at a high level from the point of view of the cost of debt. So, when it reduces, it will be important, it facilitates the debt management process reduces the cost,” he said.

The Treasury has opted to reduce bond issues in periods of greater volatility, especially impacted by the Ukraine War, the upward trend in global interest rates and fiscal uncertainties.

In 2022, bond issues on the market were below debt maturities, ending the year with a net redemption of BRL 218 billion. Even so, the Treasury’s liquidity cushion remained practically intact, helped by extraordinary gains, such as onlending of funds from public banks, dividend income and the untying of funds.

HIGH COST

In a scenario of harsh criticism by Lula of the Central Bank’s actions, Ceron stated that it is not for the Treasury to issue an opinion on the conduct of monetary policy, but said that it is undeniable that the cost of rolling over the Brazilian debt is high and is especially high now.

He added that he is rooting for Brazil to return as soon as possible “to the normality pattern”, arguing that the country has an abnormal interest rate scenario compared to other countries.

“I hope that the country has conditions, has an interest rate that generates the least impact on the cost of public debt,” he said.

Asked about the effect of Lula’s criticism of the Central Bank on interest rates and the cost of the public debt, the secretary stated that “any event that is not harmonic generates some noise, some volatility”. He pondered that it is difficult to measure this effect, but stated that the debate on monetary policy has evolved in recent weeks and is more serene.

Ceron pointed out that Brazil seeks to recover its investment grade by 2026 and believes that the approval of the tax reform this year will already make the country go up a step in the scale of risk rating agencies.

Treasury considers issuing US$ 2 billion in green bonds in the foreign market

The Treasury is also considering issuing up to US$ 2 billion in public bonds linked to environmental commitments on the foreign market later this year, said Ceron, in a strategy to take advantage of the international attention that Brazil has received on this agenda, in addition to referencing private sector operations.

“It is a concrete signal from the country to the world that this agenda is not just a narrative, it is important,” said the secretary in an interview with Reuters, adding that the Treasury could divide the launch into two issues of US$ 1 billion each.

The secretary stated that there is still a discussion about whether these bonds will be linked to specific projects or broader environmental indicators, with the second option being more likely. The decision will be taken after dialogue with the ministries of the Environment and Agrarian Development.

The launch, expected for the second half, does not depend on changes in legislation. Infralegal instruments should be published soon to pave the way for the project.

“There has to be governance behind it. Making the issuance is not the most complicated thing, but we want to tie it well so that it is successful afterwards”, said the secretary, adding that the idea is to have some accountability mechanism for ensure that commitments will actually be followed and respected.

The secretary said that the issuances of green bonds by the Treasury will also help build a price curve that will serve as a reference for issuances by private companies.

He argued that the project is important, even if the value of the initial issue is not representative for the management of the Brazilian debt as a whole. The federal public debt stock ended 2022 at BRL 5.95 trillion.

The last foreign issue by the Brazilian government was made by the Treasury in 2021, in the amount of US$ 2.25 billion. The statements made so far had no environmental link.

Ceron pointed out that the ministry is also producing measures in the area of ​​credit with an environmental focus to facilitate access to investments in areas such as clean energy and green industry.

EUROCLEAR PLATFORM

The government is still studying specific measures to increase foreign participation in public debt.

Within approximately two years, Ceron predicts that government bonds in reais will be traded on the Euroclear platform, headquartered in Belgium, which will facilitate access by non-residents to Brazilian bonds.

Today, foreigners looking for government bonds in the country need to activate brokerages that operate in the Treasury’s domestic system. With the change, the secretary hopes that in addition to facilitating access, the cost of operations for these investors will be reduced.

According to him, a task force will be set up with the Central Bank to start the first technical preparations to make the measure feasible, with which the government intends to attract institutional investors and individuals.

On another front, the Treasury wants to launch new government bonds aimed at individuals who today do not access more elaborate investment platforms.

According to the secretary, after putting into practice at the beginning of the year the title aimed at retirement, which is already in operation, the next step will be to create a role aimed at investors who wish to accumulate resources to finance their children’s studies in the future.