Itaú BBA - Temporary primary surplus in October

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Temporary primary surplus in October

November 29, 2017

Without reforms, fiscal imbalance will continue

The consolidated public sector posted a primary surplus of 4.8 billion reais in October, performing better than our forecast (2.3 billion) and market consensus (4.1 billion). The consolidated primary deficit accumulated over 12 months increased to 2.9% of GDP, from 2.4%, due to the elimination of an elevated base of extraordinary revenues coming from the repatriation of assets in October of last year. The central government’s result, as published by the National Treasury, was a surplus of 5.2 bil lion rea is in October (our estimate: 2.5 billion; Central Bank methodology: 5.0 billion), with the surprise reflecting lower discretionary spending, which will incorporate the effects of the announced budget unfreeze only in the last two months of the year. Regional governments and state-owned enterprises reported a surplus of 0.4 billion reais and a deficit of 0.6 billion, while we expected a surplus of 0.6 billion and a balanced result, respectively. With the positive surprise in revenues, both recurring and extraordinary, mandatory spending coming in below what was budgeted, and better results for regional governments and state-owned enterprises, the primary surplus for the year should be slightly better than the established target of 162 billion reais (-2.4% of GDP) for the consolidated public sector.

In spite of the surplus for the month, fiscal readings remain in a structural trend of deterioration. The nominal deficit remains high (at 9.4% of GDP over 12 months, excluding the Central Bank’s gains on FX swap transactions) and the general government’s gross debt reached 74.4% of GDP, reinforcing the extreme importance of reforms (particularly pension reform) to correct the nation’s fiscal imbalance.

The central government posted a surplus of 5.2 billion reais in October under the National Treasury’s methodology, better than our estimate and the market forecast (2.5 billion and 3.3 billion, respectively). The surprise reflected mainly lower discretionary spending. The budget unfreeze announced in September has yet to affect the current fiscal results. Therefore, in the last two months of the year this spending should show strong increases. The positive highlight continues to be the increases in revenue (see chart), with growth of 13.8% yoy in real terms (9.5% excluding intake related to tax amnesty program Refis/PRT) thanks to a broader recovery in economic activity and the tax fuel hike. Over 12 months, the central government ’s pri mary deficit widened to 3.1% of GDP in October, from 2.6% in September. The year-to-date reading is below the 2016 reading as a result of repatriations in the previous year (see chart).

Regional governments posted a surplus of 0.3 billion reais in October, while we anticipated a surplus of 0.6 billion. Year-to-date, regional governments have a surplus of 0.3% of GDP, which is higher than in 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 receded to 6.5% of GDP in October from 6.6% in September. The nominal deficit widened to 9.4% of GDP from 8.9%, reflecting the worsening primary results for the cumulative period as a result of the removal of extraordinary revenues from the base result due to the repatriation of overseas assets in 2016. Including results with FX swaps (gains of 0.1% of GDP), the nominal deficit increased to 9.2% of GDP from 8.8%.

Public debt dynamics remain unfavorable (see chart). The general government’s gross debt increased to 74.4% of GDP in October from 73.9% in September, while public sector net debt retreated to 50.7% of GDP from 50.9% during the same period. If approved, pension reform will be essential for public debt dynamics by reversing the current upward trend in pension expenses and representing a key step to complying with the constitutional spending cap, which could generate the necessary conditions for the structural decline in interest rates and a firmer rebound in economic activity.

 

Pedro Schneider



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