Brazil's primary balance for the general government in January reached a surplus of BRL27.9bn, with BRL8.0bn from regional governments, BRL20.9bn from the central government and a deficit of 1 billion from SOEs. This is an improvement from January 2015's surplus of BRL21.1bn. However, this rebound is due to one-off revenues from hydro-energy generators auctions in 2015, whose bids were cashed in 2016.

Brazil's January's real net revenues grew 6.3% y/y; however, after subtracting the one-off revenues, it actually fell 2.9% y/y, with tax revenues declining 4.8%, reflecting the recession and certain delay of tax payments. The adjusted results indicate that the underlying trend of revenues continues to fall, and the government is mostly expected to depend on one-off revenues to show any improvement in results.

 Meanwhile, the total real expenditures grew 3.8% y/y on growth in social security spending of 1.7% y/y and other mandatory spending. Payroll expenditures fell 3.3%, while discretionary spending dropped 21% y/y. The real expenditures growth rate in the past twelve months expanded 2.8%, indicating that the limits and need of the current fiscal adjustment: social security spending grew 1.4%, whereas discretionary spending declined 14%. This indicates that total expenditure will continue to grow without a change in the social security system despite the government's effort to reduce discretionary expenditures.

The primary deficit, after adjusting to the headline result, moved further down to 1.53% of the GDP. This is also true in nominal terms, where the deficit reached 10.8% of the GDP. With this, the implicated interest rate on the public sector net debt grew to 31.9% p.a., from 18.2%. The gross debt continued to increase to 67% of the GDP in January from 66.2% in December. The rebound in fiscal results in 2016 is expected to be because of one-off revenues and base effects on the spending side.

"We forecast the primary deficit to be at -1.6% of GDP, from -1.9% in 2015. The underlying trend will continue to deteriorate, as the tax base continues to shrink in line with the domestic demand recession", says Barclays.

The room to cut expenditures without altering the Constitution is very narrow now, while on the revenues side, the government is likely to avert rises in taxes that might have huge inflationary impacts in a bid to give space for headline inflation to decelerate and the central bank to lower rates.