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Spending pressures to test fiscal accounts ahead.

Steep fall in revenues in March, driven by the activity slowdown and lower transfers from CODELCO. The Central Government’s real revenues fell by 11.4% YoY in March (1.4% YoY in February), as revenues from many cyclically sensitive taxes decline by double digits, reflecting the slowdown in economic activity. CODELCO’s payouts to the fiscal coffers fell 44.9% YoY in March, declining for the fourth consecutive month in annual terms, a result of lower prices and volume. Despite the revenue declines in February and March, the large increase in revenues during January (+9.1% YoY, primarily due to the quarterly lithium-related payment), led to a slight 0.7% YoY decline in revenues in 1Q23.


Lithium-related revenue was insignificant in March, as the next large quarterly transfer is expected for April. Lithium-related revenues rose by 253% YoY in 1Q23, reflecting the large 0.4% of GDP payment in January-23. Even though lithium prices have declined, exports have trended up for several months, suggesting lithium-related revenue is likely to remain elevated this year and should exceed the Budget Office’s projection. As of 1Q23, revenue from rentas de la propiedad reached 51.4% of the annual target. Importantly, following the Autonomous Fiscal Council’s recommendations, the MoF is expected to announce the methodology to cyclically adjust lithium-related revenues soon; press reports the MoF is considering a moving 4-5 year average as a structural estimate for lithium-related revenues, with excess amounts deemed as cyclical. 


Real expenditures rise in March, increasing by 5.4% YoY in the quarter. Real expenditures rose by 5.5% YoY in March as current expenditures and capital expenditures both increased, taking the total increase in 1Q23 to 5.4% YoY. Current expenditures rose by 4.1% YoY in March, accumulating a 5.9% real increase in the quarter. Capital expenditures rose by 15.3% YoY in March, with public investment falling by 10.1% - mainly due to delays in the Ministry of Public Works - and  capital transfers rising by 34.8% YoY; capital expenditures in the quarter rose by 1.0%.


A small surplus in the first quarter of the year. While the fiscal balance in March swung to a 0.6% deficit, the monthly surpluses during the first two months of the year led to a cumulative 0.2% fiscal surplus in the first quarter of the year (0.5% in 1Q22).


Debt issuance continued in April. The MoF issued a total of USD 1.8bn in local currency bonds (maturing in 2033 and 2050, both nominal and inflation-linked) during April, taking the total amount issued during the year to USD 6.4bn, all in local currency. The MoF plans on issuing a total of USD 15bn in gross debt during 2023, of which roughly USD 12bn would be in local currency and the remaining USD 3bn in foreign currency. Another USD 0.9bn in local currency bonds are scheduled to be issued in May and roughly USD 0.5bn in June.


Dollar sales to continue through June. In line with the MoF’s guidance, dollar sales reached USD 1bn during April, taking the yearly amount to roughly USD 4.5bn. Another USD 1bn per month are expected to be sold in May and June, after which a pause on dollar sales is likely considering the seasonal surplus in peso cash balances in the aftermath of the tax season. 


Treasury assets fall to 5.5% of GDP. Treasury assets by the end of March fell sharply to USD 16.6bn from USD 22.7bn, mainly due to an important decline in CLP assets. Liquid resources invested by the Treasury (Otros Activos del Tesoro Público, or OATP) fell to USD 1.4bn (0.5% of GDP), the lowest level for March in recent history, down from 7.9bn (2.5% of GDP). Dollar denominated OATP resources fell for the fourth consecutive month to USD 932mn (USD 3.9bn by end-2022), as a result of the dollar sales program that has outweighed dollar revenues. Assets in the SWFs, entirely invested in foreign currency, rose by 3.2% nominal in March from February driven by market performance, with the Stabilization Fund reaching USD 7.7bn (up from USD 7.45bn) and the Pension Reserve Fund at USD 6.8bn (down from USD 6.6bn). No withdrawals from the SWFs have been reported thus far this year, nor are they expected to play a material role in this year’s financing plan.

Updated macro-fiscal projections postponed. According to the Budget Office, gross public debt fell to 34.4% of GDP by 1Q23, down from 37.3% of GDP by the end of 2022. In its bi-annual report, the Autonomous Fiscal Council concluded that in a baseline scenario gross public debt is expected to stabilize below 40% of GDP in a five-year horizon. No rating actions have been taken on the sovereign this year, currently rated A by Moody’s and S&P, and A- by Fitch, all with stable outlooks.


Tax reforms on standby. After the unexpected rejection of the government’s tax reform (+2.7% of GDP in additional revenue in steady state) in March, the government set up a technical roundtable to reach a common ground. As it stands, following the rejection of the bill in the Lower House, the tax reform cannot be presented in Congress until March-24, unless the Executive insists in the Senate Floor and exceeds the 2/3 quorum, which is challenging considering the opposition has half of the Senate’s votes. We expect the MoF to announce a tax reform strategy after the results of the May 7 election of the members to the Constitutional Council. Meanwhile, the mining royalty bill continues in the Finance Committee of the Senate with downward adjustments to the maximum tax paid out by large mining firms, as additional revenue is now estimated at 0.5% of GDP. The MoF is expected to present green and health tax bills that raise fiscal revenue by up to 0.4% of GDP, and recently announced its intention to present a bill that provides greater autonomy in financial decision-making by regions.

Spending pressures to test fiscal accounts. Revenue dynamics this year reflect the headwinds from the slowdown and upside surprises from lithium-related revenue. Separately, real expenditure growth has been strong, rising by 5.4% YoY in 1Q, substantially above the 0.4% rise for 2023 projected by the MoF. In any case, April data should reveal a large monthly surplus due to the seasonal tax windfall and the quarterly lithium payment. Pressure for additional spending is likely to mount with new pension fund withdrawals being discussed in Congress. We expect last year’s 1.1% nominal fiscal surplus to swing back to a deficit greater than 2% this year. 


Andrés Pérez M.
Vittorio Peretti 
Ignacio Martinez Labra