Itaú BBA - Primary surplus of 13 billion reais in April

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Primary surplus of 13 billion reais in April

May 26, 2017

Fiscal challenges remain

The consolidated public sector posted a primary surplus of 12.9 billion reais in April, beating our forecast and market consensus (both at 9.0 billion). The positive balance for the month was driven especially by favorable seasonality related to oil royalties and income taxes. The consolidated primary deficit accumulated over 12 months remained at2.3% of GDP. The central government’s result was the biggest surprise (surplus of 12.6 billion, while we estimated 8.2 billion), thanks to larger oil royalties and lower discretionary spending. Regional governments again posted a positive reading, in line with annual seasonality, but delivered below our expectation (0.9 billion surplus, while we forecasted 2.0 billion). State-owned companies had asurplus of 590 million reais.

The nominal deficit remained high, at 9.7% of GDP over 12 months, excluding the Central Bank’s gains on FX swap transactions. The level and trend of fiscal readings reinforce the need for reforms (particularly the pension reform) to reverse the structural trend of fiscal deterioration.

The central government posted a surplus of 12.6 billion reais in April under the National Treasury’s methodology, topping our estimate (8.2 billion) and market expectations (7.2 billion). Over 12 months, the central government’s primary deficit remained at 2.4% of GDP. Year-to-date, the result is in line with last year(see chart). The April surplus was caused mainly by favorable seasonality related to oil royalties and income taxes.

Compared to our forecasts, revenues were larger (by 1.9 billion), while expenses were smaller than we anticipated (by 2 billion) (see table below).The discrepancy reflected larger revenues from oil royalties and lower discretionary expenses, confirming the government’s big effort to meet the target for the primary deficit in 2017, of 139 billion reais. In the coming months, we must monitor downside risks for revenues, given growing uncertainties about the approval of the key pension reform, which may turn the fiscal scenario more challenging.

Regional governments had a surplus of 0.9 billion reais in April, disappointing our 2.0 billion estimate.Year-to-date, regional governments have a surplus of 0.3% of GDP, which is higher than recent years (see chart).

Interest expenses and the nominal deficit remained at high levels.Excluding results related to FX swap transactions, interest expenses accumulated over 12 months stood at 7.4% of GDP in April. The nominal deficit remained at 9.7% of GDP, pressuring public debt. Including results with FX swap trading (gains shrank to 0.5% of GDP from 0.7%), the nominal deficit reached 9.2% of GDP.

Public debt dynamics remained unfavorable (see chart).The general government’s gross debt edged up to 71.7% of GDP in April from 71.5% in March, while public sectornet debt was unchanged at 47.7% of GDP. 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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