Latam Strategy
25 July 2018
wwwglobalmarketsbnpparibascom 1
Brazil Pick up in nonresident flows local pension funds
increasing equity allocation
 Nonresidents’ share of Brazilian local public debt increased to BRL 431bn (~USD
111bn) as of June 2018 At current levels nonresidents hold the equivalent of
119 of Brazil’s total public debt Inflows from nonresidents amounted to BRL
154bn (~USD 44bn) in Q2
 (NEW) According to our calculations current public debt exposure for nominal
rates is USD 668mn DV01 and its monthly decay is USD 22mn Public debt
exposure for real rates (inflationlinked bonds) is estimated at USD 180mn DV01
 (NEW) We start to track the holdings of Brazilian private pension funds (EFPC)
The March 2018 report showed that they increased their share of investment in
both fixed income and equities
Decline in foreign share of Brazil’s local debt
The latest data released by the Ministry of Finance shows nonresidents’ share of Brazilian local
public debt increased to BRL 431bn (~USD 111bn) as of June 2018 Inflows from nonresidents
amounted to BRL 154bn (~USD 44bn) in the last quarter
Table 1 Charts 14 Breakdown of public debt
BRL (bn) Jun18 qq yy Mar18 Jun17
Domestic Public Debt 3607 of Total 3 12 3507 of Total 3234 of Total
Financial Institutions 815 226 4 10 785 224 743 230
Local Funds 957 265 7 25 1025 292 763 236
Pension Funds 901 250 13 9 800 228 825 255
Nonresidents 431 119 4 3 415 118 417 129
Government Institutions 158 44 3 1 154 44 157 48
Insurance Companies 140 39 4 5 135 39 147 46
Others 206 57 6 14 194 55 182 56
Public Debt Holdings Public Debt Holdings by Foreigners ()
459
428
69
37 07
Fixedrate coupon bonds
(NTNF)
Fixedrate bullet bonds
( LTN)
Inflationlinked bonds
(NTNB)
Floatingrate Bonds
Others
226
265
250
119
44
39 57
Financial Institutions
Local Funds
Pension Funds
Nonresidents
Government Institutions
Insurance Companies
Others
11
14
17
20
250
350
450
550
Sep13 Jun14 Mar15 Dec 15 Sep16 Jun17 Mar18
Foreigners＇ participation in Brazilian local debt (BRL bn)
Foreigners＇ participation in Brazilian local debt ( RHS)
(20)
( 10)

10
20
30
Sep13 May14 Jan15 Sep15 May16 Jan17 Sep17 May18
Monthly Foreigners＇ Flows (BRL bn)
Sources Bloomberg LLP Brazil’s Ministry of Finance (Ministério da Fazenda) BNP Paribas
LATIN AMERICA STRATEGY Please refer to important information at the end of the report
This document has been produced by
Banco BNP Paribas Brasil SA
Gabriel Gersztein
Head of GM Latin America Strategy
& Commodity Quant Strategy
+55 11 3841 3421
Samuel Castro
FX & IR Latin America Strategy
Commodity Quant Strategy
+55 11 3841 3492
Andre Digiacomo
FX & IR Latin America Strategy
Commodity Quant Strategy
+55 11 3841 3445



Latam Strategy
25 July 2018
wwwglobalmarketsbnpparibascom 2
Nonresidents’ share remained stable at 119 representing 29 of international reserves
(currently at USD 380bn) Local funds were the main acquirers of local debt in Q2 2018
Public debt duration
According to our calculations current public debt exposure for nominal rates is USD 668mn DV01
and its monthly decay is USD 22mn Nominal rates’ exposure is concentrated in Jan23 Jan25
and Jan27 bonds
Public debt exposure for real rates (inflationlinked bonds) is estimated at USD 180mn DV01
Monthly decay for real rates is near zero given the high convexity of these bonds Real rates’
exposure is concentrated in Aug50

Chart 5 Public debt exposure by maturity (USD DV01 mn)

Jan23
113
0
2
4
6
8
10
12
Oct18 Oct20 Oct22 Oct24 Oct26 Oct28
Current market nominal＇s exposure per maturity
(USD DV01 mn)
000
007
014
021
028
Oct18 Oct20 Oct22 Oct24 Oct26 Oct28
1 month nominal＇s DV01 decay (USD DV01 mn)
Aug50
519
0
10
20
30
40
50
Aug18 Aug26 Aug34 Aug42 Aug50
Current market real＇s exposure per maturity
(USD DV01 mn)
(050)
(030)
(010)
010
Aug18 Aug26 Aug34 Aug42 Aug50
1 month real＇s DV01 decay (USD DV01 mn)

Sources Bloomberg LLP Brazil’s Ministry of Finance (Ministério da Fazenda) BNP Paribas


Maturity schedule for next 12 months
Maturities are almost evenly spread throughout the Q3 2018 Brazil’s National Treasury (BNT)
appears to be in a comfortable position to roll over the debt stock


Chart 6 Maturity schedule by bond type (local debt BRL bn)


30
60
90
120
150
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
2018 Maturity Schedule by bond type (BRL bn)ESP (Other)
NTNC (Inflation linked)
NTNB (Inflation linked)
LFT (Floating rate)
LTN NTNF (Fixed rate)
2019

Sources Bloomberg LLP Brazil’s Ministry of Finance (Ministério da Fazenda) BNP Paribas


Annual borrowing plan guidelines
The BNT has kept almost all debt metrics within the limits of the original 2018 annual borrowing
plan The only exception is the percentage of debt maturing in 12 months which breached the
tolerance’s upper band




Latam Strategy
25 July 2018
wwwglobalmarketsbnpparibascom 3
BNT adjusted to the upside the 2018 limits for floating rate securities to 3135 from 2933
Concomitantly it also adjusted to the downside the 2018 limits for inflationlinked bonds to 27
31 from 2933 (please see Brazil’s annual borrowing plan A better scenario for 2018)
Charts 712 Brazilian federal public debt dynamics









20
25
30
35
40
45
2006 2008 2011 2013 2016 2018
10
17
24
31
38
45
2006 2008 2011 2013 2016 2018
2
5
8
11
14
17
2006 2008 2011 2013 2016 2018
13
18
23
28
33
38
2006 2008 2011 2013 2016 2018
14
18
22
26
30
34
2006 2008 2011 2013 2016 2018
34
39
44
49
54
2006 2008 2011 2013 2016 2018
Public Debt FIXED Public Debt Indexed to SELIC
Public Debt Indexed to FX Public Debt Indexed to INFLATION
of debt due in 12months
Average Maturity (in months)

Sources Bloomberg LLP Brazil’s Ministry of Finance (Ministério da Fazenda) BNP Paribas

Average cost of debt
The cost of domestic debt has decreased due to (1) the easing cycle initiated by the monetary
authority in October 2016 and (2) the convergence of inflation and credit risk premium to lower
levels (Chart 12 Table 2) This trend should persist as inflation expectations keep sliding toward
the lower levels The latest average cost (12month cumulative) released by Brazil’s Ministry of
Finance was 983
To get a better sense of the cost of the domestic public debt in the next 12 months we used the
official forecasts of BNPP economists for IPCA and Selic and our projections for USDBRL We then
factored these macro projections into the stock of LFTs LTNs NTNFs and NTNBs
The results suggest that the cost of domestic public debt will likely fall to 912 in June 2019
from 983 currently (greyshaded area red bullet point in Chart 12)


Chart 13 Table 2 Average cost of domestic debt and 2018 debt limits

Min Max Reference Interval
Stock of FPD (BRL bn) 35593 37800 39800
Composition ()
Fixed Rate 353 320 360 400 + 20
Inflation Linked 296 270 310 350 + 20
Floating Rate 315 310 350 200 + 20
Exchange Rate 36 30 70 50 + 20
Maturity Structure
Maturing in 12m 169 150 180 200 + 20
Average Maturity (in years) 43 40 42 55 + 05
2017
2018 Limits Long Term Limits
1Jun18
983
1Jun19
912
6
8
10
12
14
16
Dec 10 Jun12 Dec 13 Jun15 Dec 16 Jun18
() Average Cost of Domestic Public Debt
LFT
LTN
NTNB
NTNF
Avg Cost of DPD

Sources Bloomberg LLP Brazil’s Ministry of Finance (Ministério da Fazenda) BNP Paribas





Latam Strategy
25 July 2018
wwwglobalmarketsbnpparibascom 4
Portfolio allocation of local private pension funds
Table 3 shows how Brazilian private pension funds (EFPC) allocated their investments in March
2018 With BRL 825bn of assets under management (AUM) Brazil’s EFPC held the highest level of
their historical series
For the period total AUM rose 02 (BRL 13bn) between February and March 2018 The biggest
changes in portfolio were a BRL 26bn increase from FI funds and BRL 16bn from equity funds The
yy change in total AUM meanwhile was 65
For fixed income EFPCs increased their investments in public debt and FI funds by 73 and 63
respectively but reduced their private debt holdings by 94 accounting for 73 of total AUM 1pp
less than the same month last year In equities the major portfolio changes were an increase of
244 in equity funds and 29 in stocks ending Q1 2018 with 1pp more of total AUM (18) than
the corresponding period of last year (17)

Table 3 Charts 1416 Breakdown of local private pension fund holdings

BRL (mn) Mar18 of total mm yy Feb18 of total Mar17 of total
Fixed Income (RHS) 604364 73 04 59 602215 73 570693 74
Public Debt 144681 18 14 73 142693 17 134853 17
Private Debt 20981 3 12 94 20735 3 23146 3
FI Funds (RHS) 438574 53 00 63 438659 53 412555 53
Equity (RHS) 150936 18 06 135 151813 18 132964 17
Stocks 69144 8 35 29 71683 9 67198 9
Equity Funds 81793 10 21 244 80131 10 65766 8
Structured Investments 13664 2 09 171 13543 2 16474 2
Emerging Companies 349 0 41 14 364 0 354 0
Equity Capital 11492 1 15 191 11319 1 14199 2
Real Estate Funds 1823 0 20 52 1860 0 1922 0
Foreign Investments 0 0 00 0 0 0 0 0
Loans 20256 2 06 12 20140 2 20006 3
Real Estate 31679 4 01 28 31709 4 32576 4
Othe rs 4418 1 26 853 4538 1 2384 0
AUM 825318 02 65 823958 775097
720
750
780
810
840
Mar18 Feb18 Mar17
Total AUM (BRL bn)
0
200
400
600
800
Mar18 Feb18 Mar17
Fixed Income (BRL bn) Equity (BRL bn)
0
50
Mar18 Feb18 Mar17
Investment (BRL bn) Loans (BRL bn)

Sources Abrapp BNP Paribas
The share of EFPC’s structured investments as a percentage of total AUM has decreased since
early 2015 whereas real estate investments have remained steady Meanwhile the share of fixed
income investments rose (59 yy) while that of equities increased even more (135 yy)

Chart 1518 Pension Fund AUM and portfolio allocation

250
375
500
625
750
Mar10 Jul11 Nov 12 Mar14 Jul15 Nov 16 Mar18
AUM breakdow n (BRL bn) Others
Loans
Real Estate
Structured
Investments
Equity (RHS)
Fixed Income
(RHS)
18
73
0
20
40
60
80
0
1
2
3
4
5
Mar10 Mar12 Mar14 Mar16 Mar18
50
175
300
425
550
Mar10 Jul11 Nov 12 Mar14 Jul15 Nov 16 Mar18
Fixed Income Funds Breakdow n (BRL bn)
FI Funds (RHS)
Private Debt
Public Debt
53
0
15
30
45
60
0
5
10
15
20
Mar10 Mar12 Mar14 Mar16 Mar18
Sources Bloomberg LLP Brazil’s Ministry of Finance (Ministério da Fazenda) BNP Paribas



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IMPORTANT DISCLOSURES by producers and disseminators of investment recommendations for the purposes of the Market Abuse
Regulation

Although the disclosures provided herein have been prepared on the basis of information we believe to be accurate we do not guarantee the
accuracy completeness or reasonableness of any such disclosures The disclosures provided herein have been prepared in good faith and are
based on internal calculations which may include without limitation rounding and approximations

BNPP andor its affiliates may be a market maker or liquidity provider in financial instruments of the issuer mentioned in the recommendation
BNPP andor its affiliates may provide such services as described in Sections A and B of Annex I of MiFID II (Directive 201465EU) to the Issuer to
which this investment recommendation relates However BNPP is unable to disclose specific relationshipsagreements due to client confidentiality
obligations

Section A and B services include A Investment services and activities (1) Reception and transmission of orders in relation to one or more financial
instruments (2) Execution of orders on behalf of clients (3) Dealing on own account (4) Portfolio management (5) Investment advice (6)
Underwriting of financial instruments andor placing of financial instruments on a firm commitment basis (7) Placing of financial instruments without
a firm commitment basis (8) Operation of an MTF and (9) Operation of an OTF B Ancillary services (1) Safekeeping and administration of
financial instruments for the account of clients including custodianship and related services such as cashcollateral management and excluding
maintaining securities accounts at the top tier level (2) Granting credits or loans to an investor to allow him to carry out a transaction in one or more
financial instruments where the firm granting the credit or loan is involved in the transaction (3) Advice to undertakings on capital structure
industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings (4) Foreign exchange services
where these are connected to the provision of investment services (5) Investment research and financial analysis or other forms of general
recommendation relating to transactions in financial instruments (6) Services related to underwriting and (7) Investment services and activities as
well as ancillary services of the type included under Section A or B of Annex 1 related to the underlying of the derivatives included under points (5)
(6) (7) and (10) of Section C (detailing the MiFID II Financial Instruments) where these are connected to the provision of investment or ancillary
services
BNPP andor its affiliates do not as a matter of policy permit prearrangements with issuers to produce recommendations BNPP andor its
affiliates as a matter of policy do not permit issuers to review or see unpublished recommendations BNPP andor its affiliates acknowledge the
importance of conflicts of interest prevention and have established robust policies and procedures and maintain effective organisational structure to
prevent and avoid conflicts of interest that could impair the objectivity of this recommendation including but not limited to information barriers
personal account dealing restrictions and management of inside information
BNPP andor its affiliates understand the importance of protecting confidential information and maintain a need to know approach when dealing
with any confidential information Information barriers are a key arrangement we have in place in this regard Such arrangements along with
embedded policies and procedures provide that information held in the course of carrying on one part of its business to be withheld from and not to
be used in the course of carrying on another part of its business It is a way of managing conflicts of interest whereby the business of the bank is
separated by physical and nonphysical information barriers The Control Room manages this information flow between different areas of the bank
where confidential information including inside information and proprietary information is safeguarded There is also a conflict clearance process
before getting involved in a deal or transaction
In addition there is a mitigation measure to manage conflicts of interest for each transaction with controls put in place to restrict the information flow
involvement of personnel and handling of client relations between each transaction in such a way that the different interests are appropriately
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Bribery regulations BNPP maintains several policies with respect to conflicts of interest including our Personal Account Dealing and Outside
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prevent and avoid conflicts of interest
The remuneration of the individual producer of the investment recommendation may be linked to trading or any other fees in relation to their global
business line received by BNPP andor affiliates
IMPORTANT DISCLOSURES by disseminators of investment recommendations for the purposes of the Market Abuse Regulation
The BNPP disseminator of the investment recommendation is identified above including information regarding the relevant competent authorities
which regulate the disseminator The name of the individual producer within BNPP or an affiliate and the legal entity the individual producer is
associated with is identified above in this document The date and time of the first dissemination of this investment recommendation by BNPP or an
affiliate is addressed above Where this investment recommendation is communicated by Bloomberg chat or by email by an individual within BNPP
or an affiliate the date and time of the dissemination by the relevant individual is contained in the communication by that individual disseminator
The disseminator and producer of the investment recommendations are part of the same group ie the BNPP group The relevant Market Abuse
Regulation disclosures required to be made by producers and disseminators of investment recommendations are provided by the producer for and
on behalf of the BNPP Group legal entities disseminating those recommendations and the same disclosures also apply to the disseminator
If an investment recommendation is disseminated by an individual within BNPP or an affiliate via Bloomberg chat or email the disseminator’s job
title is available in their Bloomberg profile or bio If an investment recommendation is disseminated by an individual within BNPP or an affiliate via
email the individual disseminator’s job title is available in their email signature
For further details on the basis of recommendation specific disclosures available at this link (eg valuations or methodologies and the underlying
assumptions used to evaluate financial instruments or issuers interests or conflicts that could impair objectivity recommendations or to 12 month
history of recommendations history) are available at httpsglobalmarketsbnpparibascomgmportalprivateglobalTradeIdea If you are unable to
access the website please contact your BNPP representative for a copy of this document

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