UPDATE 2-Brazil Jan primary budget surplus rises sharply

(Recasts, adds economist comments, dividend payments)

By Elzio Barreto

SAO PAULO, Feb 28 (Reuters) - Brazil posted a record January primary budget surplus on higher oil royalties and dividends from state-owned companies, government data showed on Wednesday.

The primary surplus BRPSPS=ECI surged to 13.46 billion reais ($6.36 billion) in January from 3.06 billion a year earlier. It reversed a primary deficit of 6.45 billion reais in December, the central bank said.

The result was much higher than the 5.8 billion reais median estimate of 16 economists in a Reuters poll. The estimates ranged between 3.3 billion and 8.3 billion reais.

The primary result excludes interest payments and is closely watched by investors as a gauge of a country's ability to service its debt.

The high primary budget surplus will likely fall by the end of the year as the government puts into place a plan to spend 500 billion reais over four years on infrastructure projects to boost economic activity.

"This should follow the pattern of previous years, with strong surpluses in the beginning months that decline as the year progresses," said Solange Srour, chief economist at Mellon Global Investments in Rio de Janeiro. "The high surplus increases the government's margin for increased spending later in the year."

Brazil's primary surplus took a boost from a 1.4 billion reais dividend payment from state-controlled Petrobras in January and also from 2.7 billion reais in revenue from royalties on natural gas and oil output. Dividend payments jumped from 717.2 million reais in January 2006, while oil royalties rose from 2.5 billion reais.

INCREASED SPENDING

In the 12 months to January the government posted a primary surplus equal to 4.79 percent of gross domestic product compared with 4.32 percent of GDP in the 12 months to December 2006. The government has targeted a surplus of 4.25 percent of GDP but has said it could fall as low as 3.75 percent.

Srour expects the primary surplus to fall to 4 percent of GDP by the end of 2007 because of the infrastructure spending.

"The government has a plan to increase spending and that is just what is going to happen," Srour said.

The overall budget result BRBUD=ECI, which includes interest payments, was a deficit of 470 million reais in January, compared with a 14.9 billion reais deficit in January 2006. The so-called nominal budget deficit fell sharply from the 19.45 billion reais deficit in December.

The primary surplus target is designed to eventually cut Brazil's hefty debt load and narrow the overall budget deficit. Cutting the budget gap would help Brazil free up more credit for the private sector and help reduce high interest rates.

Net public sector debt fell to 49.7 percent of GDP in January from 50 percent in December, the central bank said. The bank forecasts the debt-to-GDP ratio to fall to 48.8 percent at the end of 2007. ($1 = 2.117 reais) (Additional reporting by Isabel Versiani in Brasilia)