Itaú BBA - Primary deficit of 11 billion reais in March

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Primary deficit of 11 billion reais in March

April 28, 2017

Fiscal challenges remain

The consolidated public sector posted a primary deficit of 11 billion reais in March, slightly narrower than our forecast (-11.8 billion) and market consensus (-11.5 billion). The consolidated primary deficit accumulated over 12 months remained at 2.3% of GDP. The central government’s result was worse than expected (deficit of 11.1 billion, while we estimated 8.8 billion), but regional governments again did better (0.9 billion surplus, while we forecasted a deficit of 0.5 billion). State-owned companies had a deficit of 300 million reais.

Regarding the central government, the deviation from our forecast was driven by higher expenses, particularly bonuses paid to low-wage workers and unemployment aid, as well as personnel and discretionary spending.

The nominal deficit accumulated over 12 months remained at a high level, at 10% of GDP, excluding gains on FX swap transactions. The level and trend of fiscal indicators reinforce the need for reforms (particularly the pension reform) to reverse the structural trend of fiscal deterioration.

The central government had a deficit of 11.1 billion reais in March under the National Treasury’s methodology, which was wider than our estimate (-8.8 billion) and market expectations (-8.8 billion). Over 12 months, the central government’s primary deficit remained at 2.4% of GDP. Year-to-date, the result remains close to levels seen one year ago (see chart).

The biggest deviation from our call came from higher expenses (by 2 billion reais ; see table below). The surprise was caused mostly by larger outlays involving bonuses paid to low-wage workers and unemployment aid and, to a lesser extent, by personnel and discretionary spending. The disappointment does not change our expectation that the central government will meet its target for the primary deficit this year, of 139 billion reais. Extraordinary revenues, roll-backs of tax exemptions and lower discretionary expenses will help the central government to start a gradual reversal in public accounts.

Regional governments had a surplus of 0.9 billion reais in March, beating our estimate of a deficit of 0.5 billion. Year-to-date, regional governments have a surplus of 0.2% of GDP, above the average of recent years (see chart).

Excluding FX swap transactions, interest expenses and the nominal deficit were stable in March and remain at high levels. Excluding FX swaps, interest expenses accumulated over 12 months remained at 7.5% of GDP in March, while the nominal deficit remained at 9.9% of GDP, pressuring public debt. Including FX swap results (gains on them shank to 0.7% of GDP from 1.4%), the nominal deficit reached 9.2% of GDP.

Public debt dynamics remains unfavorable (see chart). The general government’s gross debt edged up to 71.6% of GDP in March from 70.6% in February, while net debt advanced to 47.8% of GDP from 47.4%. If approved, the pension reform will be essential for the reversal of public debt dynamics. In addition to reversing the current upward trend in pension expenses and being a key step to comply with the constitutional spending cap amendment, it may generate the necessary conditions for the structural decline in interest rates and the rebound in economic activity.

Pedro Schneider



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