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Downturn to stress the fiscal accounts.

Andrés Pérez M. & Vittorio Peretti


Economic slowdown poses headwinds to revenue. The Central Government’s real revenues collapsed by 33.5% YoY in December, down materially from the -16.5% and -16.6% in the previous two months. The massive decline in real revenues in the month was driven by lower VAT revenue (-17.4% YoY), income taxes (-25.7%) and copper related revenue (-90.1%). The decline in copper related revenue in the month was primarily due to lower production at Codelco, and the absence of dividend payments. Despite the real contraction over the last three months, real revenues in the year increased by 6.3%, with lithium-related revenues rising by 503.2%, taking total revenues to 25.5% of GDP.

Expenditure contraction moderated in December. Real expenditures fell by 19.8% YoY in December, after falling by 35.8% in November and 30.2% in October. Current expenditures continued to fall fast (-29.6% YoY), driven mainly by base effects (the universal cash transfer program – IFE Universal – was in place last year). In contrast, real capital expenditures rose materially 27.3%, as capital transfers to regions for public works accelerated (+2.4% YoY in November). Importantly, the execution of capital expenditures appears to have normalized after a slow start earlier in the year; the fourth quarter capital expenditure reached 36.7% of the annual budget, above the 35.5% average of 2013-2021. All in all, the massive fiscal contraction is evidenced by the 23.1% real expenditure decline in the year, with expenditures reaching 24.4% of GDP.

Smaller than expected fiscal surplus in 2022. In line with seasonal patterns, the Central Government had a large deficit in December of 1.3% of GDP, significantly widening from the 0.1% deficit in November. The large deficit in December led to a significant drop in the yearly cumulative fiscal balance to +1.1% of GDP, well below the MoF’s +1.6% of GDP surplus indicated in the most recent Public Finance Report (September). Of note, this is the first fiscal surplus since 2012.

Treasury assets fall by slightly more than 1% of GDP in the month to 5.9% of GDP. After peaking at USD 15bn by the end of May, liquid resources invested by the Treasury (Otros Activos del Tesoro Público, or OATP) gradually fell towards USD 7.8bn (2.4% of GDP) in November, and then plummeted in December to USD 3.9bn (1.2% of GDP). The decline in OATP was driven by the draw-down of practically the entire cash balance in pesos, which fell from USD 3.6bn by the end of November, to USD 1.2mn by the end of December. In other words, the monthly fiscal deficit was entirely financed by peso cash balances. Dollar-denominated assets fell by USD 296mn to USD 3.9bn, falling after three monthly consecutive gains. Assets in Sovereign Wealth Funds fell in December mainly due to a USD 269mn withdrawal from the Pension Reserve Fund, that fell to USD 6.5bn (down from USD 6.8bn). Assets in the Stabilization Fund rose to USD7.5bn (up from USD7.4bn in the previous month).

Dollar sales to continue. As of the end of December the MoF had USD3.9bn in dollar assets to sell. With the peso cash balances in critical levels and peso revenue falling fast, the Budget Office announced sales of up to USD 500mn in January, and USD 2bn in February. These are relatively large amounts considering that January and February are usually fiscal surplus months. The fast decline in real revenues in pesos suggests the MoF is likely to cover shortfalls with dollar sales, or they could anticipate local currency issuances (yet unannounced). For March, we estimate the MoF could sell another USD 2bn.

Gross public debt rose above expectations. According to the Budget Office, gross public debt by the end of December rose to 37.3% of GDP, above the 36% projected in the September Public Finance Report. Updated macro-fiscal forecasts are set to be released by mid-February.

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. As a result of the worse than expected fiscal turnout in December, our gross issuance estimate of USD12 billion has an upwards bias. Regardless of the overall amount to issue, we 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 65% currently.

Tax reform makes progress in the Lower House. The Government's tax reform was recently approved in the Finance Committee of the Lower House and is set for a vote in the chamber's floor in early March. 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. The MoF has stated it is willing to review some of the instruments, including the wealth tax, as long as the reform's total revenue target remains unchanged at 3.6% of GDP (already watered down from 4.1%). 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.

The economic downturn will stress fiscal dynamics in 2023. While the fiscal outperformance in 2022 was positive on several fronts, it was supported by a massive expenditure contraction and positive revenue surprises, which are both expected to revert, as already evidenced in the December data. 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
Ignacio Martinez Labra