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Fiscal accounts deteriorated in line with our call.
2024/02/01 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

Revenues: a strong end to a disappointing year. The central government’s real revenues unexpectedly jumped by 20.8% YoY in December (-15.5% in November), breaking a string of five consecutive monthly declines, leading to an annual cumulative contraction of 12.5% (-15.1% through November). Even though revenues were better-than-expected in the month, they failed to compensate for persistently weak revenue throughout the year, as annual revenues still missed the mark and contracted by more than the MoF’s 11.1% 3Q23 projection. Revenues reached 22.9% of GDP. The jump in revenues in December is mainly associated with a 146.1% YoY increase in other income (14% of the month’s revenues), with no additional detail in the report, which we interpret as a one-off. In the year, cyclically-related real revenues (tributación resto contribuyentes) contracted by 14.3% YoY, falling by more than the 11.6% forecasted by the MoF. Revenues in the year also significantly underwhelmed in private mining (-45.2% YoY, MoF at -36.2%), and CODELCO (-44.1% YoY, MoF at -38.4%). In contrast, property rents which have been watched more closely since they include lithium-related payments, outperformed rising by 16.5% YoY, above the MoF’s 0.1% forecast, which we attribute mainly to higher than expected transfers from state-owned companies and lithium-related payments.
Expenditures: A very steep contraction in December. In the context of critically low liquid assets at the Treasury and with real expenditures having increased by 2.2% YoY through November, in line with the MoF’s 3Q23 higher expenditure forecasts, all eyes were on the size of the seasonally elevated December deficit. The MoF effectively reined in spending materially in December, with real expenditures falling by 5.6% YoY (+3.4% in November), leading to a surprisingly low annual expenditure increase of 1%. Lower spending in the month was supported by declines in current expenditures (-1.8% YoY, +4.1% in November) and capital expenditures (-15.8% YoY, +0.3% in November). As is usually the case, lower spending on public capex was key in achieving the lower-than-projected expenditure increase, having reached only 82.2% of the budgeted annual amount, while current expenditures were at 103.6%. 
A large monthly fiscal deficit, as expected. The monthly fiscal balance in December reached -0.8% of GDP (-0.4% in November, -1.3% in December 2022), leading to a YTD balance of -2.4% of GDP (-1.6% as of November, +1.1% in 2022) in line with our call yet above the MoF’s 2023 fiscal balance forecast of a 2.3% nominal deficit. The MoF likely also missed the 2.6% of GDP structural deficit, which should be announced in the next Public Finance Report (February 9). The Budget Office projects gross public debt to have reached 39.7% of GDP by the end of 2023, well above the MoF’s 38.2% 3Q23 forecast. 

Liquid treasury assets remained at very low levels in December. The MoF’s liquid treasury assets (Otros Activos del Tesoro Público) fell to USD526 million by the end of December (USD1.1 billion in November, USD3.9 billion in December 2022), the lowest end of year balance at least since 2007. Peso-denominated liquid assets were drawn down to a historical low of 0, down from USD835 million, while dollar-denominated liquid assets rose slightly at the margin to USD526 million (from USD301 million). Assets in the Stabilization Fund reached USD6 billion (1.6% of GDP), and the Pension Reserve Fund remained unchanged at USD8.6 billion (2.3% of GDP), with a USD300 million withdrawal being compensated by portfolio returns. The MoF announced a USD800 million withdrawal from the Stabilization Fund in January 2024, materializing a risk we had flagged in previous months. 

Dollar sales to continue in February. According to the Budget Office’s Monthly Asset report, the MoF's liquid dollar balances by the end of December reached USD 526 million, up from USD301 million in November, yet materially down from the USD3.9 billion of December 2022. As we had anticipated, the MoF renewed dollar sales after issuing dollar-denominated debt in January, selling for the first time in the year on January 22nd with large daily volumes of USD300 million. The large amounts sold were consistent with our view that liquid levels at the Treasury were (and still are) very low. The Ministry of Finance has stated it will sell up to USD3bn between January and the end of March. According to our estimates, the MoF should have roughly USD2 billion in dollar liquid assets by the end of January 2024. We estimate dollar sales in 2024 to range between USD8-10 billion, below the USD12.2 billion of 2023. 
Reality bites. Even though the fiscal performance was better-than-expected in December, reflecting the combination of revenue one-offs and significant expenditure contraction, the deterioration of fiscal metrics in 2023 was greater than the MoF’s forecasts. The nominal fiscal balance swung from a 1.1% surplus in 2022 to a 2.4% deficit in 2023, with gross public debt creeping up to 39.7% of GDP, up from 38% in 2022. With risks tilted to an even more gradual recovery of economic activity in 2024 (according to Imacec December data, 2023 ended with a 0.2% contraction), the weakness in cyclical revenues may persist into 2024, maintaining the pressure on the fiscal accounts. Risks are tilted towards larger than normal expenditures in January, spilling over from the December contraction. The MoF is likely to issue local currency debt in the near term to address the very low levels of liquid assets. If revenue underperformance persists in the near term, the MoF may front load its USD16.5 billion issuance plan, make additional withdrawals from the Stabilization Fund, or cut spending. The 4Q23 Public Finance Report is scheduled to be published on February 9, 2024.