Primary balance of the central government in December (Brazilian Treasury)

We forecast a primary deficit of the central government (federal government, social security, and central bank) of BRL71.9 billion in December 2016, compared with a deficit of BRL38.4 billion in November and a deficit of BRL60.7 billion in December 2015. If our forecast materializes, the primary deficit in 2016 would total BRL166.4 billion, or 2.7% of GDP. The greater deficit in December compared to that of previous months would be attributable to, in addition to seasonality, the reduction in the balance of residual payables, with impacts more concentrated in social security and discretionary expenditures. We forecast real contraction in revenues of -14.2% yoy in December 2016 (Figure 1), compared with contraction of -7.1% yoy in November. In rolling 12-month terms, growth in net revenues is expected to have declined, from -2.4% in November to -3.7% in December. December’s tax revenues will likely be influenced largely by a rise in transfers by the federal government to regional entities due to the payment of penalties under the capital repatriation program. We forecast real contraction in expenditures of -5.5% yoy, compared with expansion of 9.7% yoy in November (Figure 2). Such contraction would be explained by the favorable comparison base. In December 2015, there was a payment of BRL55.1 billion for overdue subsidies. In rolling 12-month terms, we expect a reduction in growth in expenditures, from 6.3% in November to 0.1% in December of last year.

Tax revenues growth returned to negative terrain, reaching -1.2% yoy in real terms in December, in line with our expectation. However, the decline was significantly milder than that seen up to September, before revenues having been boosted by the funds from the asset repatriation program in October. Part of this lower year-on-year contraction in December results from the less negative comparison base. As a consequence of today’s figures, tax revenues declined -3.0% in real terms in 2016. The negative dynamics of economic activity, and specifically the deterioration in labor market conditions, led to a strong decline in tax revenues which was widespread among almost all tax lines. The main exception was the increase in revenues from financial entities, most probably driven by higher interest rates and profits. The contraction in tax revenues would have been worse (-6.5% in real terms) without the asset repatriation program in 2016. As a result of the lack of a program capable of generating revenues similar to the 2016 asset repatriation program and the still struggling economic growth, we do not foresee a rebound in tax revenues in 2017.