Without reforms, fiscal imbalance will continue
• The consolidated public sector posted a primary deficit of 21.3 billion reais in September, better than our forecast (-24.8 billion) and market consensus (-23.4 billion). The consolidated primary deficit accumulated over 12 months remained at 2.4% of GDP. The central government’s result, as published by the National Treasury, was a deficit of 22.7 billion reais in September (our estimate: -24.4 billion; Central Bank methodology: -22.2 billion), with the surprise reflecting lower transfers to states and municipalities and lower discretionary spending. Regional governments and state-owned companies also posted stronger-than- expected readings, with surpluses of 0.8 billion and 0.2 billion reais (while we anticipated deficits of 0.5 billion and 0.4 billion, respectively). After extraordinary revenues materialization and recurring revenues improvement, the government should be able to meet its target for the year of a primary deficit of 162 billion reais (-2.4% of GDP) for the consolidated public sector.
• Notwithstanding positive surprises in the latest monthly report, fiscal readings remain in a structural trend of deterioration. The nominal deficit remains high (at 9.2% of GDP over 12 months, excluding the Central Bank’s gains on FX swap transactions) and the general government’s gross debt reached 73.9% of GDP, reinforcing the extreme importance of reforms (particularly the pension reform) to correct the nation’s fiscal imbalance.
The central government posted a deficit of 22.7 billion reais in September under the National Treasury’s methodology, which was in line with the market’s estimate and better than our forecast (-24.4 billion). The surprise in revenues reflected lower transfers to states and municipalities; and lower discretionary spending when it came to expenses. Higher revenues continue to stand out in the primary result, expanding 8.7% yoy in real terms (5.5% excluding intake related to tax amnesty program Refis/PRT), thanks to a broader recovery in economic activity (see chart) and the fuel tax hike. Over 12 months, the central government’s primary deficit remained at 2.6% of GDP. The year-to-date reading is close to the 2016 result (see chart).
Regional governments posted a surplus of 0.8 billion reais in September, while we anticipated a deficit of 0.5 billion. Year-to-date, regional governments have a surplus of 0.3% of GDP, which is higher than in recent years (see chart).
Interest expenses and the nominal deficit remained at high levels. Excluding results related to FX swap transactions, interest expenses accumulated over 12 months receded to 6.6% of GDP in September from 6.7% in August. The nominal deficit narrowed to 8.9% of GDP from 9.2%, reflecting lower interest rates, the beginning of a rebound in economic growth, and marginal improvement in the primary result. Including results with FX swap trading (gains of 0.2% of GDP), the nominal deficit declined to 8.8% of GDP from 9.0%.
Public debt dynamics remains unfavorable (see chart). The general government’s gross debt edged up to 73.9% of GDP in September from 73.7% in August, even though development bank BNDES returned 33 billion reais (0.5% of GDP) to the National Treasury. Meanwhile, net debt expanded to 50.9% of GDP from 50.2%. If approved, the pension reform will be essential for public debt dynamics — by reversing the current upward trend in pension expenses and being a key step to comply with the constitutional spending cap — and could generate the necessary conditions for the structural decline in interest rates and a firmer rebound in economic activity.