Itaú BBA - Primary budget deficit of 16 billion reais in July

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Primary budget deficit of 16 billion reais in July

August 30, 2017

Fiscal challenges remain

The consolidated public sector posted a primary deficit of 16.1 billion reais in July, slightly worse than our forecast (-14.7 billion), but better than market consensus (-17 billion). The consolidated primary deficit accumulated over 12 months widened to 2.7% of GDP from 2.6% in June. The central government’s result, published by the National Treasury, was below expectations (-20.2 billion, while we estimated -19.3 billion), as negative surprises in terms of revenues offset spending moves. July usually shows greater distortion between the primary results published by the Treasury (“above the line”: -20.2 billion) and the Central Bank (“below the line”: -14.0 billion), due to different accounting of subsidies. Regional governments posted a wider-than-expected deficit of 2.7 billion (vs. an estimated -0.5 billion), while state-owned companies posted a surplus of 0.5 billion (vs. an estimated 0.7 billion deficit).

All in all, the government will likely achieve the revised primary deficit target of 162 billion reais (-2.4% of GDP) for the consolidated public sector. However, there is still risks regarding the execution of extraordinary revenues, particularly tax amnesty program Refis/PERT and auctions of hydropower plants. 

Meanwhile, the nominal deficit remained high (at 9.6% of GDP over 12 months, excluding the Central Bank’s gains on FX swap transactions) and the general government’s gross debt reached 73.8% of GDP, reinforcing the extreme importance of reforms (particularly the pension reform) to reverse the structural trend of fiscal deterioration.

The central government posted a deficit of 20.2 billion reais in July under the National Treasury’s methodology, slightly worse than our estimate (-19.3 billion; see table) and market expectations (-18.7 billion). Revenues and expenses were 3 billion and 2 billion reais lower than our forecasts, respectively. The disappointment with revenues reflected lower intake from concessions (licenses granted after some airports were auctioned will only impact next month’s reading) and greater transfers to states and municipalities. Meanwhile, expenses were below expectations due to lower discretionary spending. Over 12 months, the central government’s primary deficit widened to 2.8% of GDP in July from 2.7% in June. The year-to-date balance is worse than last year (see chart). Importantly, July usually shows greater distortion between the primary results published by the Treasury (“above the line”: -20.2 billion) and the Central Bank (“below the line”: -14.0 billion), due to different accounting of subsidies (twice a year by the Treasury and monthly by the Central Bank).

Regional governments posted a deficit of 2.7 billion reais in July, while we anticipated a smaller deficit of 0.5 billion. Year-to-date, regional governments have a surplus of 0.3% of GDP, which is higher than in recent years (see chart).

We believe that the government will be able to achieve the revised primary deficit target of 162 billion reais (-2.4% of GDP) for the consolidated public sector. However, there is still a risk regarding the execution of extraordinary revenues, particularly the tax amnesty program Refis/PERT and auctions of hydropower plants. 

Interest expenses and the nominal deficit remained at high levels. Excluding results related to FX swap transactions, interest expenses accumulated over 12 months remained at 7.0% of GDP in July. The nominal deficit receded to 9.6% of GDP from 9.7% in June, but continues to pressure public debt. Including results with FX swap trading (gains of 0.3% of GDP), the nominal deficit declined to 9.4% of GDP from 9.5%.

Public debt dynamics remains unfavorable (see chart).The general government’s gross debt edged up to 73.8% of GDP in July from 73.1% in June, while net debt expanded to 50.1% of GDP from 48.7%. If approved, the pension reform will be essential for public debt dynamics — by reversing the current upward trend in pension expenses and being a key step to comply with the constitutional spending cap — and could generate the necessary conditions for the structural decline in interest rates and the rebound in economic activity.

 

Pedro Schneider 


 

 



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