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Spending pressures and weak revenues will test fiscal accounts this year
03/07/2023 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

Fiscal revenues nosedived in May, mainly driven by the activity slowdown and lower transfers from CODELCO. In the aftermath of the 29.1% YoY revenue collapse in April, in the context of the annual tax season, real revenues fell by 44.3% YoY in May, leading to an 18% real cumulative decline in the year through May. Cyclically sensitive revenues, including net tax revenues, fell by a whopping 55.6% in May, after falling by 27% in April. CODELCO’s payouts to the fiscal coffers fell by a large 67% YoY (-19.2% in April) mainly due to base effects (no dividend payment in May '23, in contrast to last year), declining for the sixth consecutive month. As we anticipated, lithium revenue was not significant in May, as the next large quarterly payment should take place in July; as of May, revenue from this source reached 72% of the MoF's annual target. 

Lower copper prices bite. Cumulative revenues through May from private mining and Codelco have declined by 54.1% YoY and 39.2% YoY respectively, mainly due to lower copper prices along with lower volumes. Revenue collection for these categories through May appears to be slightly below the MoF's annual target, with private mining at 38.4%, and Codelco at 39.7%. Copper production has consistently surprised to the downside throughout most of the year, highlighting the structural headwinds in the sector, as well as operational issues.  


Real expenditures rose by double digits in May. Real expenditures rose by 13.4% YoY in May (9.9% in April) as current and capital expenditures increased, taking the cumulative increase in the year to 7.7% YoY. Current expenditures rose by 12.3% YoY (8.6% in April), accumulating a 7.7% real increase in the year through May. Capital expenditures rose for the third consecutive month, increasing by 21.1% in May (18.7% in April), with public investment rising by 17.9% and capital transfers rising by 23.1% YoY. 


State-financed pensions fueling fiscal spending. Social security, which mainly includes the pension payouts from the Universal Guaranteed Pension program (PGU in Spanish), rose by 32.1% YoY in May (30.6% in April), accounting for 20.2% of total spending. Through May, it has increased by 30.9% YoY, taking spending in this category slightly above target at 42.6% of the MoF's annual target. Considering that beneficiaries continue to enroll in the program, we should continue to expect significant growth rates in the next few months, adding pressure to the fiscal accounts.  


Fiscal balance swung back to a deficit in May. Weak revenue performance and strong expenditure growth led to a 0.9% monthly deficit in May, well below the 0.3% of GDP surplus in May 2022. The fiscal balance in the year through May fell to a surplus of 0.4% of GDP, down from 1.3% in April. At this point last year, the cumulative fiscal balance stood at 3.2% of GDP, reflecting the change in the tide on fiscal dynamics.



Dollar sales will continue in Q3. The MoF will continue selling dollars in Q3, maintaining the maximum monthly pace of USD1bn, with a daily maximum of USD100mn. The MoF has sold USD6.2 billion in the year through June, slightly more than the USD6.1bn sold during all of 2022, yet significantly below the USD33.8bn sold during 2021. Dollar sales during the third quarter are likely to be sourced from the USD3bn in offshore bond sales executed during the second half of June. The MoF sells dollars to finance peso-denominated expenditures, not to address exchange rate considerations.


Fiscal cash balances rose due to debt issuance. Total Treasury assets rose to USD 19.8bn (~6.6% of GDP) by the end of May, up from USD 18.1bn in April, mainly driven by the ~USD3bn in local currency debt issuance during the month. Liquid resources invested by the Treasury (Otros Activos del Tesoro Público, or OATP) rose to USD4.6bn, up from USD2.7bn in April, while dollar denominated OATP resources rose significantly to USD2.7bn from USD805mn, despite of USD712mn in dollar sales during the month. The uptick in dollar-denominated balances during May likely reflects dollar inflows of ~USD1.3bn from peso denominated bond sales paid in dollars. Assets in the SWFs, entirely invested in foreign currency, fell to USD14.3bn from USD 14.6bn in April, with no withdrawals nor injections reported. The Stabilization Fund reached USD7.6bn, down from USD 7.75bn, while the Pension Reserve Fund fell to USD 6.7bn, down from USD 6.8bn, with changes in AUMs reflecting portfolio performance.


Spending pressures and weak revenues will test fiscal accounts this year. Fiscal spending continues to accelerate at a surprising pace, taking the cumulative real expenditure growth through May to 7.7% YoY, well above the MoF's 0.6% annual estimate. Separately, revenue dynamics have disappointed materially throughout the year, reflected by the 18% YoY decline through May. In this context, the MoF is likely to accelerate the execution of its USD15bn debt financing plan for the year, and may even have to issue slightly more to cover shortfalls, reallocate spending, or even withdraw from the Stabilization Fund by the end of the year. We expect last year’s 1.1% nominal fiscal surplus to swing back to a deficit greater than 2% this year.