Fiscal revenues collapsed in April, driven by the activity slowdown and lower transfers from both CODELCO and private mining. Revenues underperformed materially in the annual April tax season (Operación Renta), driving the Central Government’s real revenues down by 29.1% YoY (-11.4% YoY in March), as revenues from many cyclically sensitive taxes declined by double digits, reflecting the slowdown in economic activity. CODELCO’s payouts to the fiscal coffers fell 19.2% YoY (-44.9% in March), declining for the fifth consecutive month, a result of lower prices and volumes. Accumulated revenues in the year through April have declined by 12.5% YoY in real terms, despite a significant outperformance of lithium-related revenues.
Large quarterly lithium payment, yet below prior payouts. Lithium-related revenues (solely in rentas de la propiedad) reached roughly USD 1.1bn in April, rising by 99.2% YoY, taking the annual intake to USD 2.6bn (~0.9% of GDP). After several months of declines, lithium prices appear to have stabilized, while export volumes 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 April, revenue from rentas de la propiedad reached 68% of the revised annual target.
Real expenditures rose further in April. Real expenditures rose by 9.9% YoY in April (5.5% in March) as current and capital expenditures increased, taking the cumulative increase in the year to 6.5% YoY. Current expenditures rose by a whopping 8.6% YoY, above the 4.1% in March, accumulating a 6.5% real increase in the year. Current expenditures are primarily driven by the large increase in pension payouts and health spending, that have risen by 30.6% YoY through April, accounting for 20.2% of total spending. Capital expenditures rose for the second consecutive month, increasing by 18.7% in April (15.3% in March), with public investment rising by 7.8% and capital transfers rising by 28.2% YoY.
Small fiscal surplus in April points to fiscal headwinds. Weak revenue performance and strong expenditure growth led to a 1% monthly surplus in April, well below the 2.4% of GDP in April 2022. The fiscal balance in the year through April sits at a surplus of 1.3% of GDP.
Debt issuance prepares fiscal coffers for the rest of the year. The MoF continued its debt issuance plan during May, issuing close to USD3bn in local currency bonds (nominals maturing in 2033 and both nominal and inflation-linked bonds maturing in 2050). Total sovereign issuance year-to-date reaches USD9.4bn, all in local currency, of which USD3.1bn are short-term notes maturing in August this year. As a result, the MoF still plans on issuing USD8.8bn for the rest of the year as part of the 2023 gross debt plan of USD15bn. Of note, only USD3bn of this annual plan is expected to be in foreign currency denominated bonds, notably down from the USD6bn in 2022, and USD15.5bn in 2021. In June, the MoF has scheduled roughly USD0.4bn in local currency bonds through the Central Bank’s auction system, and we expect the government to issue local currency bonds through the book-building process and foreign currency denominated bonds before August. The issuance calendar for the third quarter should be announced by the end of June.
Dollar sales to continue in June. After being on the sidelines for the first three weeks of May, the MoF started selling dollars again on May 22nd, accumulating a total of USD712mn in the month. The MoF has sold a total of USD5.2bn year-to-date. Another USD1bn is expected to be sold in June. We were expecting a pause in dollar sales after June but considering weak revenue performance in the April tax season, the MoF may have to continue selling at a similar USD1bn pace in July.
Fiscal cash balances remain at low levels. Total Treasury assets rose slightly to USD 18.1bn (~6% of GDP) up from USD 16.6bn in March, partly driven by local currency debt issuance. Liquid resources invested by the Treasury (Otros Activos del Tesoro Público, or OATP) rose from the critically low levels of March yet remain low from a recent historical perspective at USD 2.7bn (0.8% of GDP); this is about half of the average level since 2018. Dollar denominated OATP resources fell for the fifth consecutive month to USD 805mn (USD 3.9bn by end-2022), because of the dollar sales program that has outweighed dollar revenues. Assets in the SWFs, entirely invested in foreign currency, reached USD 14.6bn, with the Stabilization Fund reaching USD 7.75bn and the Pension Reserve Fund at USD 6.8bn, both essentially unchanged from the prior month. 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.
Debt projected to rise in the next few years, as spending pressures persist. In its updated Public Finance Report, the Budget Office projects gross public debt to rise to 38% of GDP by the end of 2023, up slightly from 37.3% of GDP by the end of 2022. Gross debt is projected to peak at 41.6% of GDP in 2025 and retreat slightly to 41.1% by the end of 2027. The Budget Office’s macro assumptions seem optimistic, as the economy’s average growth rate for 2023-2027 is estimated at 2.5%, above other estimates (IMF: 2.16%, BCCh: 2.1% trend growth for 2023-2032). Also real expenditures are projected to rise by 1.82% on average, well below the 5.5% for 2010-2019.
Mining royalty bill finally approved. After several years of discussion, Congress approved a new mining royalty bill, putting an end to the uncertainty on the sector’s tax burden. The royalty establishes a new maximum tax burden of 46.5% on taxable operating income for mining firms producing more than 80 thousand tons of copper per year, and 45.5% for companies producing between 50 thousand and 80 thousand tons. Separately, large copper mining firms will have to pay a 1% ad valorem rate. According to the MoF’s estimates, the reform is expected to generate roughly 4.5% of GDP when fully phased-in.
Other tax reforms still on standby. We expect the MoF to announce a strategy for the tax measures that were rejected by the Lower House in March-23; the rejected reform would have boosted revenues by 2.7% of GDP when fully phased-in. The MoF is expected to present green and health tax bills that raise fiscal revenue by up to 0.4% of GDP.
Weak revenue dynamics and ramped up fiscal spending cement the case for a fiscal deficit this year. At the surface, the 1.3% of GDP fiscal surplus accumulated in the year suggests fiscal dynamics haven’t really been tested yet. However, there are several signs of concern. Revenues are underperforming even with a lithium-related windfall of 0.9% of GDP. Cumulative real expenditure growth at 6.5% goes well beyond the MoF’s 0.6% annual estimate, with spending pressure to grind higher. We expect last year’s 1.1% nominal fiscal surplus to swing back to a deficit greater than 2% this year.
Andrés Pérez M.
Ignacio Martínez Labra