Itaú BBA - Frequently Asked Questions: Fiscal Accounts

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Frequently Asked Questions: Fiscal Accounts

March 22, 2016

The report summarizes frequently asked questions we have been receiving from clients regarding fiscal accounts.

The report below summarizes frequently asked questions we have been receiving from clients regarding fiscal accounts. Our macro research team answers:

1. How is the 2015 nominal deficit split between primary, interest payments and FX?

Nominal Deficit: -10.3% of GDP

Primary: -1.9% of GDP

Interest rate payments: -7.0% of GDP

Swaps: -1.4% of GDP

2. What’s our estimate for FX swap gains as % of GDP year-to-date?

BRL 41.5 billion or 0.7% of GDP

3. How do we forecast FX swap costs?

If the forecasted BRL depreciation (% change) is equivalent to the ex-post short-term interest rate (CDI) minus the domestic dollar interest rate during the period, the central bank will net zero gains or losses. If the depreciation is greater than the CDI minus the domestic dollar interest rate, the Central Bank will incur losses, and vice-versa. For simplicity and convenience, we assume constant FX swap stock going forward.

4. What is the interest rate paid on gross government debt and what rate does the government get on its financial assets?

The government pays an average rate of 12.5% on its gross debt. The government earns TJLP on public bank assets (currently at 7.5%), and a relatively low rate of interest on USD reserves (approximately equal to the 5-year treasury rate).

5. How does the interest rate on gross debt change in 2016?

The average interest rate on gross debt should remain stable in 2016 vis-à-vis 2015 (changing slightly from 12.5% to 12.4%). Although we forecast lower interest rates in 2016, as long-term (and cheaper) fixed-rate government bonds mature, new bonds are issued at higher rates than previous bonds, therefore cancelling out the effect of lower rates on floating bonds.

6. Can we reconcile moves in gross debt versus the fiscal deficit in 2014 and 2015?

There are items that can cause public debt to rise that are not captured in the deficit (such as funding to public banks).

7. Is BNDES going to make repayments to the Treasury this year?

When the government paid delayed expenses to BNDES by the end of last year, BNDES anticipated a debt payment worth BRL 30 billion. We don’t expect additional anticipations this year.

8. What was the increase in gross public debt in the last 5 years over and above the fiscal deficit?

The debt owed by public banks (mainly BNDES, but also BB and Caixa) to the treasury increased by BRL 325 billion in the last 5 years.

9. Where will BNDES get funding from? Does this mean that BNDES’ balance sheet will not grow in 2016?

We don’t expect the treasury to give more funding to BNDES this year, and it seems that the bank doesn’t need more funding because the demand for credit from companies has been very weak.

10. What are the government’s financial assets that take gross debt to GDP down from 66% to 36% on net basis?

 



 

11. Can the government sell any assets to help bring down the deficit?

Yes. The sales of assets could bring relief, but it does not solve the problem of deteriorating debt dynamics coming from fiscal deficits.

12. Do states & municipalities really run a primary surplus? What is the overall fiscal position of states & municipalities?

Regional governments do not make available the details on their income and expenses. The surplus of regional governments last year (BRL 9.7 billion) should be unsustainable. Revenues are declining strongly and expenditures are difficult to cut (rigid budget). They were probably able to post a surplus by delaying expenses. For 2016, we forecast a regional primary deficit of BRL 10 billion, or 0.2% of GDP.

13. A split of 2015 primary deficit and how this changes in 2016:


 


 



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