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A good start: 47 billion reais primary surplus in January

February 28, 2018

Meeting the primary target of the year will be less challenging

The consolidated public sector posted a primary surplus of 46.9 billion reais in January, close to our forecast (47.3 billion) and above market consensus (37.1 billion). The consolidated primary deficit accumulated over 12 months shrank to 1.5% of GDP from 1.7%. The central government’s result, as published by the National Treasury, was a surplus of 31.1 billion reais (our estimate: 30.0 billion). The most noteworthy developments of the month were 8 billion reais in extraordinary revenues from REFIS/PRT tax amnesty program, a nominal decline of 3 billion reais in subsidy expenses vs. one year earlier, and discretionary spending remaining at low levels. Regional governments posted a surplus of 10.5 billion reais, while state-owned companies had a deficit of 0.1 billion reais (while we anticipated a surplus of 11.0 billion and zero, respectively). 

Results indicate that meeting primary targets in 2018 will be less challenging than in recent years. As the economy recovers, 11 billion reais in extraordinary revenues are needed to meet the annual target. This amount will likely be achieved, and the annual reading should be better than the target, given that, in January alone, we saw 5 billion reais in extraordinary revenues net of transfers to regional governments .

Furthermore, public debt dynamics (particularly gross debt) should pose less restrictions in 2018. The general government’s gross debt reached 74.5% of GDP in January, while the public sector’s net debt hit 51.8% of GDP. Despite the still-negative annual primary results, the repayment by development bank BNDES of 130 billion reais to the National Treasury, better economic growth and lower real interest rates will keep gross debt as a share of GDP virtually stable in 2018. 

However, without reforms (such as the pension reform), fiscal results will go back to a deteriorating trend from 2019 onward. If controlling public expenses as set by the spending cap is not made feasible, gradual convergence to primary surpluses that are compatible with public debt stabilization will be halted, fueling doubts about the consistency of the rebound in economic activity and sustainability of interest rates at historically-low levels.

Under the National Treasury’s methodology, the central government posted a surplus of 31.1 billion reais in January, beating market estimates (24.0 billion) and nearing our call (30 billion). The surprise compared to our forecast was caused by lower mandatory expenses, especially those related to student loan program FIES. The most noteworthy developments of the month were 8 billion reais in extraordinary revenues from REFIS/PRT, a nominal decline of 3 billion reais in subsidy expenses vs. one year earlier, and discretionary spending remaining at low levels (see chart). Meanwhile, recurring revenues continued to improve and expanded 5.0% yoy in real terms. It was the best January reading as a percentage of GDP in many years (see chart). Over 12 months, the central government’s primary deficit receded to 1.7% of GDP from 1.9% in December.


Regional governments posted a 10.5 billion reais surplus in January, close to our 11 billion estimate. January offers positive seasonality for the results of states, municipalities and the central government. Year-to-date, regional governments have a surplus of 0.2% of GDP, in line with recent years (see chart).

Interest expenses and the nominal deficit continue to decline slowly (see chart). Excluding results related to FX swap transactions, interest expenses accumulated over 12 months receded to 6.0% of GDP in January from 6.2% in December. The nominal deficit narrowed to 7.6% of GDP from 7.9%. Including results with FX swap trading (gains of 0.1% of GDP), the nominal deficit declined to 7.5% of GDP from 7.8%.

Public debt dynamics remains unfavorable (see chart). The public sector’s net debt climbed to 51.8% of GDP in January from 51.6% in December, while the general government’s gross debt expanded to 74.5% of GDP from 74.0%. Despite still-negative primary results, the upward trend in public debt is set to moderate in the next years, reflecting the cyclical rebound in economic activity, historically-low interest rates and BNDES repayments to the National Treasury. However, keeping this scenario consistently favorable depends strictly on the approval of reforms (such as the pension reform) to signal the gradual return to primary surpluses that are compatible with structural stabilization in public debt. Without reforms, the government is less likely to meet the constitutional spending cap from 2019 onward, fueling doubts about the sustainability of the rebound in economic activity and low interest rates going forward.


 

Pedro Schneider



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