Itaú BBA - Primary deficit of 25 billion reais in March

Macro Brazil

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Primary deficit of 25 billion reais in March

abril 30, 2018

Fiscal rebalancing will only come with reforms

 • The consolidated public sector posted a primary  deficit of 25.1 billion reais in March, close to our forecast (-24.9 billion) and market consensus (-24.5 billion). The consolidated primary deficit accumulated over 12 months deteriorated to 1.6% of GDP from 1.4%. The central government’s result, as published by the National Treasury last week, was a deficit of 24.8 billion reais (our estimate: -21.5 billion). Discretionary expenses increased after being several months at low levels and 10 billion reais in payments in judicial payments (the so-called “precatorios”) were anticipated, after taking place in May last year. Regional governments posted a surplus of 0.6 billion reais, while state-owned companies had a deficit of 0.2 billion reais (we estimated a surplus of 0.7 billion and a deficit of 0.3 billion, respectively). Despite this weak reading, meeting primary targets in 2018 should be less challenging than in recent years.

 • The general government’s gross debt reached 75.3% of GDP in March, while the public sector’s net debt hit 52.3% of GDP. Notwithstanding still-negative annual primary results, the repayment by development bank BNDES of 130 billion reais to the National Treasury, better economic growth and lower real interest rates will keep gross debt as a share of GDP virtually stable in 2018. However, without reforms (such as the pension reform), fiscal readings will resume a worsening trend from 2019 onward.

Under the National Treasury’s methodology, the central government posted a deficit of 24.8 billion reais in March, disappointing market estimates (-18.0 billion) and our call (-21.5 billion). Lower revenues from oil royalties and greater discretionary spending were behind the surprise. The increase in discretionary expenses followed several months of low readings (see chart), but is in line with the room provided by the annual budget, amid the recovery in revenues. Furthermore, the result was driven by the expected anticipation of 10 billion reais in payments related to judicial deposits (the so-called “precatorios”), which took place in May last year. Overall, the year-to-date reading (see chart) is slightly above that of the previous two years. Over 12 months, the central government’s primary deficit worsened to 1.7% of GDP in March from 1.5% in February.

Regional governments posted a surplus of 0.6 billion reais in March, slightly missing our 0.7 billion estimate.  Year-to-date, regional governments have a surplus of 0.2% of GDP, in line with 2016, but worse than in 2017 (see chart).

Interest expenses and the nominal deficit continued to recede slowly (see chart). Interest expenses accumulated over 12 months declined to 5.7% of GDP in March from 5.9% in February. The nominal deficit widened to 7.4% of GDP from 7.3%. Results related to FX swap transactions remain near zero.

Public debt dynamics remains unfavorable (see chart). The public sector’s net debt climbed to 52.3% of GDP in March from 52.0% in February, while the general government’s gross debt expanded to 75.3% of GDP from 75.1%. In 2018, despite still-negative primary results, the upward trend in public debt is set to moderate, reflecting the cyclical rebound in economic activity, historically-low interest rates and BNDES repayments to the National Treasury. However, keeping this favorable scenario consistently depends strictly on the approval of reforms (such as the pension reform) to signal the gradual return to primary surpluses that are compatible with structural stabilization in public debt. Without reforms, the government is less likely to meet the constitutional spending cap from 2019 onward, fueling doubts about the sustainability of the rebound in economic activity and low interest rates going forward.


Pedro Schneider

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