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Real expenditures fall by 35.8% in November.

Andrés Pérez M. & Vittorio Peretti


Economic slowdown and lower copper prices pose headwinds to revenue.The Central Government’s real revenues fell by 16.5% YoY in November, declining at essentially the same rate as in October (-16.6%), driven by lower VAT revenue (-6.5% YoY), income taxes (-15.3%) and copper related revenue (-74.5%). Despite the real contraction over the last two months, cumulative real revenues in the year are up by 11.5%, with lithium-related revenues rising by 563.2%, taking total revenues to 23.7% of GDP.

Expenditure contraction accelerates in November.After falling by 30.2% in October, real expenditures fell by 35.8% in November, mainly due to base effects (the universal cash transfer program – IFE Universal – was in place last year), while real capital expenditures rose by 2.4%, increasing for the second consecutive month as regional transfers for public works programs ramp up. The massive fiscal contraction is evidenced by the 23.6% cumulative real expenditure decline in the year through November, with expenditures reaching 21.2% of GDP.

Large fiscal surplus in 2022.The Central Government fiscal balance in November swung back to a deficit of 0.1% of GDP, after a 0.3% surplus in October, in line with end of the year seasonal dynamics. The yearly cumulative fiscal surplus through November reaches 2.4% of GDP, while the rolling 12m nominal fiscal balance continues to improve reaching 1.4% of GDP (0.8% of GDP in October). While a deficit is expected in December, the cumulative nominal fiscal balance is likely to exceed the MoF’s 1.6% of GDP surplus forecast.

Treasury assets steady at roughly 7.2% of GDP.After peaking at USD 15 billion by the end of May, liquid resources invested by the Treasury (Otros Activos del Tesoro Público) fell for five consecutive months, yet rose slightly for the first time in November to USD 7.8 billion (2.5% of GDP). While total liquid resources rose slightly, dollar-denominated assets rose by USD 835 million to USD 4.2bn, marking the third consecutive monthly sequential gain. In contrast, local currency denominated assets fell for the fourth consecutive month to USD 3.6bn, from USD4.2bn the previous month, falling to the lowest level since March this year. Assets in Sovereign Wealth Funds rose in November due to portfolio returns, with the Stabilization Fund reaching USD7.4bn (up from USD7.1bn in the previous month), and the Pension Reserve Fund reaching USD6.8bn (up from USD6.5bn).

Public debt to stabilize this year, while Fitch maintains Chile’s rating.According to the MoF’s projections (September), gross public debt is projected to remain practically unchanged at 36% of GDP by the end of this year, after fourteen years of consecutive increases. The transitory fiscal outperformance this year is reflected in Fitch maintaining Chile’s long-term foreign currency rating at A- and stable outlook (December 8). Moody’s and S&P both rate Chile at A with a stable outlook.

No debt issued since October, as eyes are set on 2023 financing needs.The MoF has not issued debt since October 2022, and has not yet formally announced its financing needs for 2023. We estimate gross issuance for this year at USD 12 billion, of which roughly USD 5.6 billion would be new financing and the remaining share refinancing; these are substantially lower financing needs than in the previous years. We also expect at least 80% of the issuance in 2023 to be in local currency, as the MoF gradually tries to take back the local currency share to its pre-pandemic level of 80%, from its 65% currently.

Tax reform still in discussion in the Lower House.The administration’s tax reform, presented in July with an initial target of 4.1% of GDP in additional fiscal revenue per year, has made progress in the Finance Committee of the Lower House albeit with changes that lowered the revenue estimate to 3.6% of GDP. Voting in the committee has been along party lines, which suggests the reform is likely to slow in the Senate, especially considering that the opposition has a majority in the Senate’s Finance Committee. The MoF expects the tax reform to be approved by May, however previous tax reforms have taken substantially longer. That being said, adjustments to the mining royalty bill are likely to be approved in the coming months. Proposed legislation to the fiscal framework, including a debt ceiling, an escape clause and a correction mechanism, is currently in the Finance Committee of the Senate after being approved in the Lower House Floor in December 2021.

Swift fiscal adjustment in 2022 to swing back to a deficit this year.The fiscal performance in 2022 has been supported by a massive expenditure contraction and positive revenue surprises, which are both expected to revert. The 2023 fiscal budget considers a 4.2% real expenditure increase, which could be even higher considering statements by the MoF on additional spending to support households. Separately, the MoF projects a real revenue contraction of 12.7% in 2023, primarily due to the slowdown in economic activity. These dynamics should take the fiscal nominal balance to a deficit of over 2% of GDP.

Andrés Pérez M.

Vittorio Peretti