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A surplus to start the year

Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra


Revenues rise after three consecutive declines. After falling for the past three consecutive months, including a 33.5% YoY decline in December, the Central Government’s real revenues rose by 9.1% YoY in January. The rise in January was primarily driven by a whopping increase in lithium-related revenue (523.6% YoY), and an uptick in private mining revenue (5.9% YoY), while VAT revenue fell again (-17.1% YoY). Codelco’s payouts to the State fell again, by -3.9% YoY in January, after falling by 90.1% in December.

Lithium saves the day. Lithium-related revenue (rentas de la propiedad) jumped in January to roughly USD1.3bn (0.4% of GDP). To place this number into the broader context of the fiscal projections, January’s lithium-related revenue accounted for 46% of the MoF’s annual forecast, suggesting its forecast was conservative. In any case, SQM, the main lithium producer in Chile, reported larger than anticipated sales to China towards the end of last year, in advance to the end of subsidies for electronic vehicles. As a result, lower lithium sales are expected in the first months of the year, already evident by a 22% MoM nominal decline in January lithium exports.

Real expenditures rise, as base effects finally fade. Real expenditures rose by 13.1% YoY in January, after several months of double-digit contractions (19.8% YoY in December). Current expenditures rose by 13.1% YoY, after massive contractions last year (-29.6% YoY in December), as base effects finally fade (the universal cash transfer program – IFE Universal – ended in December 2021). Real capital expenditures also increased (12.9% YoY), following several months of increases. Overall, revenue growth at the start of the year appears particularly strong considering that it is forecasted by the MoF to rise by 1.2% in the entire year.

Starting the year with a monthly surplus. Revenues reached 2.5% of GDP, and expenditures 1.8%, taking the monthly fiscal balance to a surplus of 0.7% of GDP (in line with January 2022).

Treasury assets flat at roughly 6% of GDP. Liquid resources invested by the Treasury (Otros Activos del Tesoro Público, or OATP) fell slightly in the month to USD 3.3bn (1% of GDP), from USD 3.9bn by the end of December. After practically depleting the CLP cash balance by the end of last year, it increased slightly to USD 619mn in the month, remaining at very low levels with respect to the recent past. Dollar-denominated assets fell by USD 584mn to USD 3.3bn, falling for the second month in a row, primarily due to dollar sales in the month (USD 490mn). Assets in Sovereign Wealth Funds rose in January due to market performance, with the Stabilization Fund reaching USD 7.7bn (up from USD 6.8bn), and the Pension Reserve Fund at USD 6.8bn (up from USD 6.5bn).

Dollar sales to continue. With falling CLP revenues and low cash balances, we expect dollar sales to be an important source of expenditure funding in the coming months, at least through May, once the April tax season leads to the annual surplus bounce in CLP cash balances. The MoF sold roughly USD 500mn in January, and USD 2bn in February. We expect the MoF to sell between USD 1-2bn this month, and similar amounts during April and May.

Gross public debt rose above expectations. According to the updated Public Finance Report (February-23), gross public debt by the end-2022 rose to 37.3% of GDP from 36.3% by end-2021. Gross public debt is projected by authorities to rise by 1.5% of GDP by the end of 2023, peak at 41.7% of GDP by 2025, then gradually fall to 40.4% by the end of 2027.

Government to issue USD15bn in debt this year. The MoF announced plans to issue up to USD 15bn in gross debt this year, of which roughly USD 8.2bn would be new debt and the remaining USD 6.8bn in debt to finance amortizations. Local currency issuances are programed to reach USD 12bn, and the remaining USD 3bn in foreign currency. Local currency issuances concentrated in shorter term notes totaling roughly USD 4.6bn began in February, earlier than usual. We expect offshore issuances totaling USD 3bn to take place as soon as this month, and local currency issuances at longer tenors to resume later, likely through auctions at the Central Bank and book-building processes with simultaneous participation of non-residents and locals.

Tax reform discussion resumes in the Lower House. The Government's tax reform was approved in January in the Finance Committee of the Lower House, prior to the Congressional recess, and is likely to be voted in the chamber's floor next week. The tax reform is likely to pass the first legislative hurdle with an approval in the Lower House Floor, yet may be challenged in the Senate, where the opposition has half of the seats. After the MoF stated it was willing to review the tax measures, including the wealth tax, maintaining the reform's total revenue target at 3.6% of GDP (already watered down from 4.1%), business associations proposed replacing the wealth tax for an increase in the corporate tax (currently 27%, above the 21.5% 2022 OECD average). Separately, the mining royalty bill was approved by the Senate's Mining Committee in early January and was sent to the Finance Committee, where its discussion is likely to become intertwined with the other elements of the tax reform. Proposed legislation to the fiscal framework, including a debt ceiling, an escape clause and a correction mechanism, is also in the Senate's Finance Committee, after being approved in the Lower House Floor in December 2021.

Fiscal accounts to be tested. In the aftermath of last year’s fiscal outperformance, driven primarily by transitory factors, fiscal dynamics this year will shift with a projected decline in revenues and a rise in expenditures. While real revenues could eventually fall by less than the MoF’s projected contraction of 12.7%, due to better than expected activity and conservative lithium-related revenue forecasts, expenditures began the year with a strong 13.1% growth in the month, meaning full year expansion of 1.2% will be challenging also considering pressures for additional spending. These dynamics should take the fiscal nominal balance to a deficit of over 2% of GDP this year.

Andrés Pérez M.

Vittorio Peretti

Ignacio Martinez Labra