Itaú BBA - Higher-than-expected primary surplus in January

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Higher-than-expected primary surplus in January

February 24, 2017

Regarding the central government, lower discretionary spending took the spotlight.

The consolidated public sector posted a primary surplus of 36.7 billion reais in January, topping our forecast (BRL 27.0 bn) and market consensus (BRL 18.8 bn). The consolidated primary deficit accumulated over 12 months narrowed to 2.3% of GDP (from 2.5% in December 2016). The central government (BRL 26.3 bn) as well as regional governments (BRL 10.8 bn) delivered larger-than-expected surpluses, while state-owned companies had adeficit of 384 million reais.

Regarding the central government, lower discretionary spending took the spotlight. Apparently, the main contribution to low execution of discretionary expenses came from strong payments in delay (the so-called “restos a pagar”) late last year, including expenses that are often accounted for in January.

The nominal deficit accumulated over 12 months declined to 8.5% from 9.0% of GDP, but excluding the Central Bank’s gains/losses on FX swap transactions, the nominal deficit stands at a high level (10% of GDP), reinforcing the need for reforms (particularly the pension reform) to reverse the structural trend of fiscal deterioration.

The central government posted a surplus of 19.0 billion reais in January, under the National Treasury’s methodology, beating our estimate (2.0 billion) and market expectations (9.4 billion). Over 12 months, the central government’s primary deficit narrowed to 2.4% of GDP in January from 2.5% of GDP in December.

Revenues printed 2 billion reais above our estimate, while expenses were 15 billion reais lower than we anticipated (see table).On the expenditure side, the main surprise came in discretionary spending (investment, administrative costs), due to the government implementing fiscal adjustment and also lower payments of delayed expenses. According to the Treasury report, low discretionary expenses in January was produced by “the organization process of public accounts carried out in 2016, which reduced fiscal pressure in January 2017.” In fact, the government paid several expenditures in delay by December last year, opening room for lower spending early this year (see chart).

Regional governments had a surplus of 10.8 billion reais in January, above expectations (our forecast: 5.5 billion reais).Hence, regional governments began 2017 with a surplus of 0.2% of GDP (see chart).

Interest expenses and the nominal deficit declined in January, but remain at high levels. Interest expenses accumulated over 12 months narrowed to 6.1% of GDP from 6.5% in December, reflecting the increase in gains related to FX swap transactions to 1.5% of GDP from 1.2%. The nominal deficit shrank to 8.5% of GDP from 9.0%, remaining at a level that pressures public debt. Excluding financial results with FX swaps, the nominal deficit stands at 10% of GDP.


Public debt dynamics was relatively stable during the month, but remains unfavorable (see chart).The general government’s gross debt edged up to 69.7% of GDP in January from 69.6%, while net debt advanced to 46.4% of GDP from 46.0% in December. If approved, the pension reform will be essential for public debt dynamics, by reversing the current upward trend in pension expenses and possibly setting the necessary conditions for the structural decline in interest rates and rebound in economic activity.


André Matcin



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