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Federal Budget FY19-20 Long Road to Redemption, (AKD Research, Jun 12, 2019)

FEDERAL BUDGET 2019-20

 

Long Road to Redemption

Painful, but necessary: The first real test of PTI’s resolve, Budget’20 clearly focuses on documentation and increasing tax net at the expense of political mileage. Targeted tax collection at PkR5.55tn (FBR) certainly appears ambitious where we believe steps undertaken including rationalization of GST, FED and CDs on various sectors will likely be insufficient – AKD estimates tax collection at ~PkR5.0tn. Macro indicators continue to paint a dismal picture where FY20F GDP growth at 2.4% and CPI reading at 11%-13% raise eyebrows. Worryingly, the GoP forecasts account for subpar growth till FY22 (peak growth: 4.5%) while fiscal deficit estimate at 7.2% despite significantly higher revenues is concerning. Of interest are GoP’s public debt targets where focus on shorter tenor bonds appears higher vis-à-vis longer tenors, contrasting IMF’s historical mandate of skewing towards the longer paper (PIBs: -ve71%YoY growth in net proceeds; T-bills: +ve9.4x growth).

Equities – Lull to continue: Regulatory changes for capital markets per se have been far and few where i) continuation of CGT rate, ii) abolishment of tax credit for BMR investment and iii) freezing of corporate tax rates have disappointed. That said, increased tax rates on profit on debt and particularly bringing of capital gains on property sale under normal tax regime may bring some sense of positivity to equities. That said, increase in FBR rates to ~85% of market value may incentivize longer term holding periods. Coupled with stringent KYC requirements within capital markets (thank you FATF), flows from real estate to equities may actually fail to materialize.

Sectoral impacts have mostly ranged from Negative to Neutral with focus on the former. Implementation of Treasury Single Account (TSA) may weigh heavily on index heavyweight Banking sector. Other sectors with Negative impacts include i) Autos (FED levy), ii) Power (WHT on dividends increased to 15% from previous 7.5%), iii) Textiles (zero rating withdrawal; 17% GST), Consumer Goods (10% duty under 8th Schedule from previous exemption) and iv) Cable & Electrical (inclusion in Third schedule with 17% GST applicable). Pharmas, with positive budgetary developments, are a rarity in the current budget (RMs, APIs on more than 19 items now CD exempt from previous 3%).

Conclusion – still skeptic in the short run but long term positive: Pakistan is likely to witness some tough economic times where tax collection and deficit control are likely to be formidable challenges. While we believe the incumbent government has taken steps in the right direction, confidence building measures will need to be undertaken particularly with respect to GoP’s narrative. P/E at 7.3x in isolation appears positive, however, is insipid when compared with sovereign yields. We believe any euphoria whether on the Market Support Fund or else may be short-lived where from budget’s context, negatives certainly outweigh the positives, at least in the now.

AKD Research

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AKD Securities Limited
AKD Securities Limited

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