Fiscal data shows better result in the short term
• The consolidated public sector posted a primary deficit of 17.4 billion reais in February, in line with our forecast (-17.2 billion) and market consensus (-17.4 billion).The consolidated primary deficit accumulated over 12 months shrank to 1.4% of GDP from 1.5%. The central government’s result, as published by the National Treasury, was a deficit of 19.3 billion reais (our estimate: -20.0 billion). The highlight of the month was the maintainance of low discretionary expenses. Regional governments posted a surplus of 2.0 billion reais, while state-owned companies had a deficit of 0.4 billion reais (we anticipated a surplus of 4.5 billion and zero, respectively). Results reinforce that meeting primary targets in 2018 will be less challenging than in recent years.
• The general government’s gross debt reached 75.1% of GDP in February, while the public sector’s net debt hit 52.0% of GDP. Notwithstanding still-negative annual primary results, the repayment by development bank BNDES of 130 billion reais to the National Treasury, better economic growth and lower real interest rates will keep gross debt as a share of GDP virtually stable in 2018. However, without reforms (such as the pension reform), fiscal readings will resume a worsening trend from 2019 onward.
Under the National Treasury’s methodology, the central government posted a deficit of 19.3 billion reais in February, slightly better than market estimates (-20.7 billion) and our call (-20.0 billion). The most noteworthy fact of the month was that discretionary expenses remained at low levels (see chart), despite the room provided by the annual budget and recovering revenues. Meanwhile, recurring revenues continued to improve and expanded 10.7% yoy in real terms. As a percentage of GDP, figures remain brighter than in recent years (see chart). Over 12 months, the central government’s primary deficit receded to 1.5% of GDP in February from 1.7% in January.
Regional governments posted a surplus of 2.0 billion reais in February, disappointing our 4.5 billion estimate. Year-to-date, regional governments have a surplus of 0.2% of GDP, in line with 2016, but worse than in 2017 (see chart).
Interest expenses and the nominal deficit continue to decline slowly (see chart). Interest expenses accumulated over 12 months receded to 5.9% of GDP in February from 6.0% in January. The nominal deficit narrowed to 7.4% of GDP from 7.6%. The result related to FX swap transactions worsened from a gain of 0.1% of GDP to zero.
Public debt dynamics remains unfavorable (see chart). The public sector’s net debt climbed to 52.0% of GDP in February from 51.8% in January, while the general government’s gross debt expanded to 75.1% of GDP from 74.5%. Despite still-negative primary results, the upward trend in public debt is set to moderate in the next years, reflecting the cyclical rebound in economic activity, historically-low interest rates and BNDES repayments to the National Treasury. However, keeping this scenario consistently favorable depends on the approval of reforms (such as the pension reform) to signal the gradual return to primary surpluses that are compatible with structural stabilization in public debt. Without reforms, the government is less likely to meet the constitutional spending cap from 2019 onward, fueling doubts about the sustainability of the rebound in economic activity and low interest rates going forward.