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Cumulative fiscal deficit widens.
2023/11/03 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

Revenue contraction continues, yet decelerates at the margin. The central government’s real revenues fell by 8.4% YoY in September (-10.8% in August), contracting for the eighth consecutive month, leading to an annual cumulative decline of 16.1%. Again, revenue dynamics were driven by weakness in cyclically sensitive revenue (tributación resto contribuyentes, 79% of total monthly revenues) which fell by 9.8% YoY (-19.5% in August). Copper-related revenue was mixed in the month, with revenues from CODELCO increasing by 7.4% YoY (16.6% in August), whereas revenues from private-mining companies fell by 28.9% (-6.3% in August). Lower prices and weaker production this year have led to a 49.8% YoY real decline in CODELCO’s payouts to the state, and a 49.2% YoY real decline in private-mining company contributions. Relative to the MoF’s 3Q23 forecast, Codelco and private-mining payouts are tracking somewhat below forecast at 68% and 70% of the respective targets (Codelco: 0.5% of GDP, private mining: 1% of GDP). Even though total real revenues through 3Q23 have declined by 16.1% YoY, they are in line with the MoF's annual revenue target of an 11.1% decline, as they have reached about 73.7% of the total, close to the 74.3% YTD average between 2012-2019.

Fading support from lithium. Revenue from property rents, tracked more closely since last year mostly due to its relationship with lithium payments, rose by 31.6% YoY in September, reaching 3.8% of the month’s total revenue. The rise in September was driven mainly by an important transfer from ENAP (the national petroleum company) for USD150 million, accounting for roughly 74% of property rents in the month. Property rents through September reached roughly 1.2% of GDP, equivalent to 89% of the MoF’s 3Q23 annual forecast, supported at the margin by transfers from state-owned companies (ENAP in September, and BancoEstado in August). The next quarterly lithium payment should take place in October; considering falling exports (USD285 million in September, - 55% YoY), we should expect these contributions to take another leg down, yet should through year-end allow for property rents to reach the MoF's 1.5% of GDP revenue target.

Expenditure contraction kicking in. Real expenditures fell by 7.8% YoY in September (-12.4% in August), contracting for the third consecutive month, with annual declines in both current and capital expenditures. Current expenditures contracted by 6.8% YoY in September (-13.9% in August), driven by annual declines in subsidies and donations, due to base effects from the job creation program (IFE Laboral) and last year’s transfers to the fuel stabilization mechanism, partly countered by a 7% real increase in personnel expenditures. Payouts related to the state-guaranteed pension program continue to increase (5.9% in September), but have slowed materially. Surprisingly, public capital expenditures fell by 15.2% YoY (-0.9% in August), with a 20.5% YoY contraction in public investment and a 11.2% decline in transfers. Overall, real expenditures have increased by 1.3% YoY through 3Q23 sharply decelerating from the 6.9% YoY by the end of 2Q23, facilitated by the expenditure contractions of the past three months. Expenditures have reached 71.7% of the MoF's annual target, somewhat above the 70.2% average for 2012-2019, suggesting additional compression will be needed in 4Q23 to deliver on the fiscal targets.

Cumulative fiscal deficit fell again in 3Q23. The monthly fiscal balance in September was -0.5% of GDP (-0.2% in August, -0.5% in September 2022), leading to a YTD balance of -1.2% of GDP (-0.7% as of August, +2.2% as of September 2022).  


Liquid treasury assets at critically low levels. The MoF’s liquid treasury assets (Otros Activos del Tesoro Público) fell to USD1.2 billion by the end of September, down from USD1.9 billion, the lowest September balance at least since 2007. The decline in the month took place in both dollar-denominated liquid assets (to USD618 million) and peso-denominated liquid assets (to USD565 million). Critically low levels of liquid assets explain the MoF’s decision to issue debt for a total of roughly USD3.1 billion in book-building processes in international markets and auctions through the Central Bank. The MoF concluded its issuance plan in international markets and has local auctions for a total of roughly USD180 million for the rest of the year, as the deficit seasonally widens materially, suggesting a withdrawal from the Stabilization Fund is increasingly likely. Assets in the Stabilization Fund reached USD5.7 billion (1.6% of GDP) by the end of September, and the Pension Reserve Fund had USD8.2 billion (2.3% of GDP).


Low dollar balances point to limited MoF dollar sales for the rest of the year. Considering that the MoF sold USD610 million in October, equivalent to the end-September balance (USD618 million), dollar sales during the November-December period should be limited to the sum of 4Q23 dollar inflows, which we estimate at roughly USD2.2bn. This is an estimate that comes from issuances (USD868mn), dollar-denominated mining revenue (USD900mn), and other sources such as one-off transfers from state owned firms (USD400mn). As such, while the MoF should continue selling dollars throughout the rest of the year as the fiscal deficit widens, low dollar balances suggest they are unlikely to sell the USD2bn monthly cap. 


Our above-consensus fiscal deficit call of 2.5% of GDP now has a slight downward bias. While the cumulative fiscal deficit through September continues to widen, reaching 1.2% of GDP, the expenditure contraction of the past three months has been significant, and the steep decline in revenues through 2Q23 has moderated. The real test in 4Q23 will take place on two fronts. First, the ability to rein in current expenditures that are tracking in line with the MoF's forecast through 3Q23 and tend to account for around 75% of spending in the final quarter in the year; at only 51.5% of the annual capital expenditure target through 3Q23, there does not seem to be much more room to compress public capex. Second, a swift stabilization in the performance of cyclically sensitive revenues and an improvement in mining-related revenue throughout the final quarter of the year, both feasible considering the better-than-expected momentum in activity. In any case, public coffers are still stressed, as reflected by low levels of liquid assets and the Treasury issuing more than the USD15 billion annual plan; we cannot rule out a withdrawal from the Stabilization Fund to cover the widening of the deficit towards the end of the year.