A share of 10.2% is a far cry from the 20.8% held in 2015 when country boasted an investment-grade rating

05/20/2024

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Rogério Ceron — Foto: Gesival Nogueira Kebec/Valor

Figures from the National Treasury show that foreign investors have gradually increased their participation in Brazil’s public debt, although they are still a long way from regaining the share they had in the past when the country had the so-called investment grade rating from risk assessment agencies. Despite the government’s optimism, experts believe that it is too early to say that this movement is here to stay and that Brazil will quickly return to previous levels of non-resident participation in the debt.

Data from the latest Monthly Debt Report (RMD), released by the Ministry of Finance, indicate that the share of foreigners in public debt rose again and reached double digits for the second time since the beginning of 2023, closing at 10.2% in March, compared to 9.8% in February and 9.5% in December. In addition, the Treasury announced that the flow of non-residents into domestic federal government securities (DPMFi) reached R$51.8 billion in the first three months of this year, compared to R$60.7 billion in the 12 months of 2023.

Foreigners’ share of Brazilian debt peaked in March 2015, when it reached 20.8%. With the loss of the investment-grade label by the rating agencies a few months later, the share fell dramatically and closed 2022, for example, at 9.4%.

“This increase is happening, and I have the impression that it is structural, as it comes in the wake of all the rating agencies improving Brazil’s prospects,” Treasury Secretary Rogério Ceron told Valor. “The change in the rating allows funds, albeit on the margin, to start allocating to countries that are close to investment grade,” he added.

At the same time as being cautious, experts estimate that, with the recent rating upgrades by the three main risk agencies (Fitch, S&P, and Moody’s), even if the presence of foreigners in the debt does not immediately return to close to 20%, there is a tendency for the participation to gradually increase. In March, according to the Treasury, non-residents increased their participation mainly in bonds with maturities of between one and three years. Bonds over five years, in turn, also showed an increase in participation of R$5.9 billion.

“The brutal change in the composition of investors should happen when Brazil achieves investment grade. Until then, if we continue with this evolution [on the part of the rating agencies], participation will increase marginally,” said the Treasury secretary.

In terms of debt profile, experts say that participation is still far from ideal since there are few purchases of National Treasury Notes series F (NTN-F), a fixed-income security with semi-annual interest and a fixed rate, considered the best profile for public debt management.

This is because, as the traditional buying profile of foreigners tends to be fixed-rate and long bonds, the participation of non-residents helps the Treasury to manage the public debt since a higher percentage of these investors buying these bonds causes the yield curve to be pulled down. Today, non-residents hold 45.88% of NTN-F, a percentage that reached 60% during the period in which the country boasted an investment-grade rating.

“Their profile is one of interest in longer fixed-rate bonds, while banks and treasury departments tend to prefer shorter bonds and National Treasury Bills [LTN],” said Daniel Leal, fixed-income strategist at BGC Investimentos.

Another point that makes experts cautious about a possible permanent increase in non-resident debt is that foreigners’ purchases have been concentrated in National Treasury Bills (LFT), a floating-rate security that has been the flagship of public debt financing in the first quarter of this year. Non-residents increased their stocks of these securities by R$22.8 billion from January to March. Of the entire portfolio, 3.41% of LFTs are held by non-residents, compared to 1.22% at the end of 2015.

Mr. Leal points out that large international funds, for reasons of governance, can only buy bonds from countries with an investment-grade rating—often, more than one rating agency has to give this seal to the country. “But some funds have flexibility; they can make this allocation and anticipate it. Some of the nominal increase we’ve seen is already a reflection of this,” said the expert.

“We’ve lost the flow of investors who have a mandate to buy countries’ debt with the loss of investment grade,” said Fernando Ferez, fixed-income strategist at Necton. For him, having 10.2% of the debt in the hands of non-residents is too little.

Even if Brazil regains its investment grade rating in the future, experts believe that it is not possible to predict that foreigners will have the same percentage of the public debt as before since Brazil’s debt today is much larger than in the past.

Since 2023, the National Treasury has been trying to trade public debt securities on the global Euroclear platform, based in Belgium, with the intention of increasing foreign participation in the debt. Today, for an international fund to buy bonds in Brazil, for example, it has to access the Central Bank’s Special Settlement and Custody System (Selic), which increases costs.

Valor has learned that since then, the government has encountered some difficulties in the negotiations. It was noted, for example, that the Central Bank has more control over the information flow of operations, unlike the European platform. The same applies to tax issues with the Federal Revenue Service. Even so, negotiations are continuing.

According to Mr. Ceron, Brazil is still pursuing access to trading on Euroclear, which could generate annual interest savings of up to R$70 billion based on countries that have started trading their bonds on the global platform. “Isn’t it worth looking into and overcoming the operational problems given the savings we would have in interest?” asked the secretary. “Euroclear is willing to make adjustments to provide the necessary information,” said Mr. Ceron. He expects this process to go ahead later this year.

Regarding the recent growth, albeit small, of non-residents in the federal public debt, Mauro Rochlin, economist and professor at the Getúlio Vargas Foundation (FGV), says that the movement coincides with Brazil’s lower country risk indicator.

“We see that the country risk is now below 200 points, and this has been happening more frequently despite a certain volatility in the indicator. This coincides with greater stability in macroeconomic policy,” Mr. Rochlin said.

According to the professor, the stabilization of the country’s debt-to-GDP ratio will be necessary in attracting more foreign investors. “A more stable macroeconomic policy and a macroeconomic scenario with lower inflation, a stable debt-to-GDP ratio, and growth that, in my opinion, will be close to 3%, provides more security for foreign investors.”

*Por Guilherme Pimenta, Jéssica Sant’Ana — Brasília

Source: Valor International

https://valorinternational.globo.com/