Public Sector Posts a Primary Deficit in May
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1 Brazil Monday, June 30, 2014 Public Sector Posts a Primary Deficit in May Highlights The public sector posted a primary deficit of 11.0 billion real in May, the lowest for the month in the series started in Year-to-date, the consolidated primary fiscal surplus stands at 1.5% of GDP (2013: 2.4%), also an all-time low. The trailing twelve-month surplus fell to 1.5% of GDP (April: 1.9%) in the conventional gauge, with both federal and regional governments posting a lower budget performance. The recurring primary surplus decreased to 0.5% of GDP (April: 0.8%) in the same period, the lowest level since Today s figures highlight the reduced probability of reaching this year s fiscal target (i.e., a consolidated primary balance of 1.9% of GDP). Especially taking into account the current slowdown in tax collection (resulting from the activity cooling in the 2Q14), as well as the adverse base-effects to weigh on twelve-month results by yearned (e.g., revenues from Libra oil field auction and Refis tax amnesty program). The likely execution of mandatory expenditures postponed in recent months will probably create further headwinds until December. We maintain our forecast for a consolidated primary surplus of 1.3% of GDP this year, as we count on further atypical revenues to be registered this year. Our scenario also assumes a slowdown in discretionary expenses in the latter part of A consolidated primary deficit in May According to data from the Brazilian Central Bank (BCB), the public sector posted a primary deficit of 11.0 billion real in May, short of market analysts' forecasts (revised last Friday to a deficit of 9.0 billion reals). As a percentage of the monthly GDP (our favorite metric), this deficit is equivalent to -2.5%, significantly below May s average in the post- Lehman years[1] ( : +1.0% GDP). In fact, today s headline was the only consolidated primary deficit posted for a May since the beginning of the series in The gap was largely due to an underperformance of the central government, which posted a (below the line[2]) primary deficit of 11.1 billion reals. Virtually null contributions stemmed from subnational entities, as states and municipalities added 12 million real, and state-owned companies totaled 15 million reals. Year-to-date, the public sector primary balance stands at 1.5% of GDP. This number lags the result seen over the same period a year ago (2.4%) and in the post-lehman average (3.1%). To be true, the year-to-date consolidated primary balance in 2014 is the lowest in the series (since 2002). The (naturally) high correlation between primary fiscal results obtained until January to May and the balance recorded for the full-year reinforces the idea that the chances of delivering this year's primary surplus target (1.9% of GDP) are limited. Please refer to the last page of this report for important disclosures, analyst and additional information. Itaú Unibanco or its subsidiaries may do or seek to do business with companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the single factor in making their investment decision.
2 7% 6% 5% 4% Graph 1: Public sector s primary fiscal balance (YTD Vs. Full-Year) % GDP 5.3% 5.3% 5.9% 4.7% 5.2% 5.9% correl: 0.96 ( ) Primary Fiscal Balance (Jan-May) Primary Fiscal Balance (full-year) 3.9% 3.6% 3% 2% 1% 3.3% 3.7% 3.8% 3.2% 2.6% 3.3% 3.4% 2.7% 2.0% 1.8% 3.1% 2.4% 2.4% 1.5% 1.9% 1.9% (target) 0% Source: Brazilian Central Bank, Itaú The decline in this year s fiscal efforts is especially concentrated in the federal government level, whose year-to-date balance decreased to 0.9% of GDP, from 1.7% last year. Regional government s primary surplus also shows signs of deceleration, as the 2014 balance stands at 0.7% of GDP, compared to 0.8% last year. This contrasts with the sharp increase in central government transfers to states and municipalities (about +9% in real terms, year-to-date). The trailing twelve-month conventional primary surplus (i.e., with no adjustment for temporary operations or economic cycles) fell to 1.52% of GDP in May from 1.87% in April. That is amongst the lowest readings since November The recurring primary surplus (i.e., excluding atypical revenues and expenses) decreased to 0.53% of GDP from 0.84% in the previous month, the lowest reading in our series begun in 2002 (Graph 2). 4.0% Graph 2: Public Sector's Primary Fiscal Balance (12m) 3.5% 3.0% 2.5% 2.0% 1.5% 1.52% 1.0% Conventional Primary Surplus % GDP Recurring Primary Surplus 0.53% 0.5% May-08 May-09 May-10 May-11 May-12 May-13 May-14 Source: Brazilian Central Bank, Itaú Page 2
3 The drop in regional governments' budget performance is one of the takeaways from May s fiscal data. Although states and municipalities had shown a significant improvement in the first two months of 2014, their contribution to the consolidated primary balance is diminishing. The trailing twelve-month balance dropped to 0.29% of GDP in May, compared to a local peak of 0.42% in February. Year-to-date, primary surplus of states and municipalities is the lowest in the series, which points to higher chances that regional governments will not deliver the primary result budgeted for 2014 (0.35% of GDP). For a detailed discussion on the central government s budget result in May, refer to Monday s Latam Talking Points: Brazil Central Government Posts a Wide Primary Deficit in May. Nominal deficit and public debt The public sector s nominal deficit (a fiscal measure that includes interest expenses) stood at 3.5% of GDP in the twelve months to May (April: 3.1%). The recurring nominal fiscal gap (i.e., adjusting for atypical primary revenues and spending) upped 0.3 p.p. to 4.5% of GDP. The public sector s interest expenses remained stable at 5.0% of GDP in May, helped by a positive monthly result of 2.2 billion real obtained with the BCB s exposure to dollarswaps. For this year, we continue to forecast a lower primary surplus and a continued increase in the Treasury s financing costs. These factors should add pressure on the nominal deficit, which we expect to widen to somewhere above 4.0% of GDP until the end of The public sector s net debt went up to 34.6% of GDP in May from 34.2% in April, reflecting the month s primary deficit. The gross debt of the general government (excluding government owned-companies and the BCB) edged up to 58.0% of GDP in May from 57.8% in the previous month. The gross debt adjusted for FX reserves increased to 41.0% of GDP in May from 40.7% in April. That is the highest level since June Fiscal outlook for 2014 May budget figures have further reduced the (already-limited) chances of achieving this year s fiscal target. Especially if one bears in mind the adverse base-effects expected for November, when large atypical revenues obtained in 2013 (i.e., the Refis tax amnesty program and the Libra oil field auction, adding to 0.7% of GDP) will be discarded from the twelve-month statistics. The necessity to execute some mandatory expenses delayed in recent months will probably lead to a payback in federal spending, with an impact that we calculate around 0.15% of GDP. Thus, unless a large budget leeway (of nearly 0.9% of GDP) is created very soon, the annual budget performance is poised to see a big drop in the last months of Building such a fiscal leeway will not be an easy task at all. Incoming economic activity data suggest that more deceleration in tax collection is in the making for the next few months. Judging from recent government initiatives to lift revenues in the very short term, the June budget performance, in particular, will probably be weak. Page 3
4 For now, we maintain our full-2014 primary surplus projection at 1.3% of GDP. Our projection is increasingly hinging on the government s ability to raise extraordinary revenues, and to tighten the belt on discretionary spending in the end of That said, the downside risk towards our 2014 primary surplus forecast is widening. Mauricio Oreng Luiz Felipe Priolli [1] Choosing the post-lehman as a basis of comparison for the monthly fiscal performance reflects the search for a parameter that better signals consistency of the result with a narrower primary surplus target seen in recent years. Thus, we usually compare the monthly fiscal print to a less challenging benchmark, as compared to the elevated primary surplus recorded in the years of [2] The below the line ( abaixo da linha ) primary fiscal balance follows the Brazilian Central Bank (BCB) methodology, which obtains its final number through monthly net debt changes for each public sector entity. This approach is somewhat different from the one used by the National Treasury Secretariat (STN, in Portuguese acronym), the above the line criteria ( acima da linha ). The latter follows the analysis of revenues and expenditures to calculate the central government primary fiscal surplus (before the interest payments). Macro Research Itaú Ilan Goldfajn Chief Economist Click here to visit our digital research library. Page 4
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