Itaú BBA - Central Government Posts Primary Deficit in 1H15 and Public Debt Remains on the Rise

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Central Government Posts Primary Deficit in 1H15 and Public Debt Remains on the Rise

July 31, 2015

Recent data indicate that this year’s fiscal primary surplus may be close to zero.

The central government posted a primary deficit in the first half of the year, amid a significant challenge on the revenue front (due to declining economic activity), and because expenditures are not being cut by the magnitude required to achieve a surplus this year. Regional governments accumulate a considerable surplus year-to-date, but this will probably not be sustained, as the Treasury is expected to relax financing conditions for states and municipalities in the second half of the year. All this means that the consolidated primary result may be close to zero this year (revised target: 0.15% of GDP; previous target: 1.1%; 2014: -0.6%).

The consolidated primary result hit BRL -9.3 billion in June, weaker than our forecast (-6.0 billion) and market expectations of around BRL -3.0 billion.These estimates were actually revised after the weak central-government data released yesterday. The central government was responsible for the negative surprise to our estimate (BRL -8.6 billion, while we expected BRL -4.0 billion). Regional governments partially compensated with a BRL 56 million surplus (we expected a BRL 2.0bn deficit). Government-owned companies registered a deficit of BRL 813 million.

The central government accumulates a primary deficit of BRL 1.9 billion year-to-date.This is the lowest result for the first half of the year in the historical series (started in 1997), and underscores the challenge for the central government to achieve its (recently revised) year-end target of BRL +5.8 billion (0.1% of GDP).

Regional governments accumulate a surplus of BRL 19.3 billion year-to-date, but this will probably not be sustained.The government has recently revised regional government’s full-year target to BRL 2.9 billion, or 0.05% of GDP (from BRL 11.0 billion). We recently learned that the Treasury plans to relax financing conditions for regional governments (after a tight stance in the first half of the year), which will allow regional governments to achieve a lower primary surplus.

Within the central government, the main surprise to our estimate in June came from higher government spending (by BRL 3.5bn relative to our estimate).Discretionary administrative costs were again the main surprise (BRL 2.8bn higher than our expectation). The government’s goal was to reduce discretionary administrative costs to the same nominal level of 2013. So far this year, spending through this line accumulates BRL 97.2 billion, against BRL 85.4 billion in the same period of 2013. There were also payments of delayed expenses, such as interest-equalization disbursements to BNDES (BRL 2.5 billion in June), but this was already accounted for in our estimate.

Total government spending increased 2.0% yoy in real terms in June, and declined 1.1% year-to-date.The main spending cut is on investment (-36.8% ytd), while administrative costs are rising 2.9%. Payroll expenses are down by 2.1%. The real increase in social security expenses (3.0% ytd) and the life-long monthly income (3.4% ytd) - both transfers to the elderly – underscores the difficulty to achieve a meaningful fiscal adjustment of the spending side.

The spending cuts are insufficient to offset the decline in tax collection.Tax collection declined 3.7% yoy in real terms in the three months ended in June. In our view, the weak performance is mainly due to the decline of economic activity, especially in consumption and the job market, where Brazil’s tax burden is concentrated.

Public debt continues to increase.Net public debt increased 0.9pp from May to June, reaching 34.5% of GDP. The appreciation of the exchange rate in June caused an increase in net debt of around 0.4pp of GDP. Gross debt increased 0.5pp to 63.0% of GDP (up by 4.1pp this year), despite the central bank’s gain with FX swaps equivalent to BRL 8.1 billion (almost 0.2% of GDP) last month. The twelve-month nominal deficit increased to 8.1% of GDP, from 7.9% in May. Net interest expenses reached -7.3% of GDP (from -7.2% in May), while the primary result stands at -0.8% (-0.7% in May). Public debt is expected to continue on the rise, because the primary surplus is below the level required to stabilize the public debt dynamics.


Luka Barbosa


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