Pakistan: Likely facets of Federal Budget FY24

Most challenging times to present the Federal Budget for next year (FY24) amid stagflation and lots of uncertainties related to upcoming elections and how Pakistan will bridge its external account funding gap.

This uncertainty on financing US dollar funding gap is creating nervousness in currency, bond and stock markets as Pakistan faces very high probability of default.

Moreover, on the political front with Imran Khan's PTI being sidelined, it is possible that a weak coalition government may come to power in elections. It will be interesting to see how aggressive and competent the new setup will be to deal with this economic crisis.

To create good optics, it is possible that the government may set an unrealistic revenue target to create space for spending in the budget.

The present Government is scheduled to announce Federal Budget FY24 on June 09, 2023. It seems highly unlikely that the government headed by Shehbaz Sharif will be able to complete the current IMF program on time.

The general perception is that regardless of the status of the current IMF program, Pakistan will have to enter another and a bigger IMF program.

The incumbent government is under immense pressure due to an Economic slowdown and high inflation and could take steps to appease the public in the upcoming budget through some sort of expansionary policies including direct cash subsidies for the underprivileged and increase in minimum wages. Any excessive spending would be ill-advised without substantial tax collection measures.

The Budget outlay for FY24 is estimated up to PKR15 trillion as against PKR9.6 trillion proposed for FY23 assuming record high mark up cost due to high interest rate.

The Government is likely to set tax revenue collection target at above PKR9 trillion for FY24 or 8.6% of GDP, as against a target of PKR7.5 trillion for FY23 and 29% higher than expected tax collection for FY23.

The Revenue targets in the past have also varied on an average by 8% in last 5 years from actual and analysts expect the same to happen in FY24 amid economic slowdown.

The Non-tax revenue target for FY24 is estimated at PKR2.5 trillion or 2.4% of GDP as against PKR1.6 trillion or 2% of GDP estimated for FY23. This seems achievable given higher SBP profit share and significant jump in PDL.

The Federal Public Sector Development Program (PSDP) is estimated at PKR0.9 trillion for FY24. However, analysts fear major cuts in this due to fiscal constraints. Consolidated PSDP (Federal and Provincial) is anticipated at PKR2.6 trillion or 2.5% of GDP for FY24.

Some of the taxation measures under consideration include: 1) Tax on undistributed reserves, 2) Continuation of Supertax, 3) Shift from Final Tax Regime to Minimum Tax Regime, 4) Asset Tax/Wealth Tax, 5) Higher tax on Non filers, 6) Tax on rental income, and 7) Additional Tax on Banks, Tobacco and Beverage sectors.

Budget is anticipated to be Neutral to Positive for Stock Market as analysts don’t expect major steps in budget that can affect the market and key listed sectors.

Courtesy: Topline Securities

 

 

Pakistan Stock Market Witnesses Return of Foreign Investors

The benchmark index of Pakistan Stock Exchange closed the week ended 24^th March 2017 at 48,971, up paltry 1.16%WoW. Investors remained cautious and activity remained lackluster with average daily traded volume at 257.8 million shares. KEL led volume charts with 140.9 million shares) as NEPRA determined the company’s multi‐year tariff  (MYT) reducing its base tariff from PkR15.57/kWh to PkR12.07/kWh which was followed by news reports of PM Sharif forming a committee to review the tariff after a meeting with Chairman of SPIC (Shanghai Electric’s parent company). Other key developments for the week included: 1) current account deficit for February 2017 was reported at US$744 million, taking cumulative 8MFY17 deficit to US$5.47 billion, up 120%YoY, 2) PIB yields remained flat at the latest auction with GoP raising PkR28.5 billion, 3) February 2017 fertilizer off‐take declined by 19%MoM/2%YoY to 491,000 tons, 4) HBL announced plan to sell its Kenyan branches in exchange for 4.18% holding (13.28 million shares) in Diamond Trust Bank Kenya and 5) PSMC considering shelving its planned US$450 million investment in spare parts plant and capacity expansion. Stocks leading the bourse were: SNGP, AGTL, MEBL and EFERT and laggards were: KEL, ICI, UBL and APL. Foreign interest was positive during the week with inflows of US$3.47 million compared to US$11.07 million net outflow a week earlier. Little surprise is expected at the Monetary Policy announcement scheduled on 25^th March as marker expects rates to remain unchanged. On the global front, representatives of the five monitoring OPEC/Non‐OPEC countries will meet to review compliance with the members’ deal to curb supply by 1.8 million bpd. Market is likely to remain volatile till clarity about the upcoming FY18 federal budget.

Current account continues to steadily deteriorate with 8MFY17 cumulative deficit to 1.7% of GDP or US$5.47 billion. This reflects rising imports (+11.2%YoY) this fiscal year on the back of higher oil prices (8MFY17 oil imports up 15.4%YoY) along with greater machinery (12%YoY) and auto (36%YoY) imports. This has been exacerbated with weak exports (down 2%YoY in 8MFY17) and tepid remittance flows (down 2.5%YoY). In February 2017 deficit was registered at US$744 million, lower than US$1.2 billion recorded in January 2017 helped by lower imports for the month ( down 6.2%MoM) and US$350 million CSF inflows under service exports received earlier. Going forward, unfavorable trade dynamics will prompt further weakness in the deficit, with additional CSF inflows of US$200 million received in March 2017 and expected recovery on the remittance in 4QFY17 based on seasonal trends.

NEPRA has released KEL's MYT for the years FY17‐23 with numerous details still to be sorted. Salient features of the tariff include: 1) seven year period covered under the determination as opposed to the request for ten years, 2) raising of T&D benchmark, 3) allowance for passing through of increased O&M expense with inclusion for WPPF and WWF, 4) allowance of write-offs up to 1.78% of Electricity sales revenue in any given year, and 5) planned CAPEX of PKR237.6 billion allowed for in the tariff and adjusted in the base tariff. Contrary to increased allowances and benchmarks, the base tariff for the utility has been decreased to PkR12.00/ KwH (after adjusting for T&D and fuel), a reduction of PkR0.94/KwH over FY16's tariff, raising concerns of a tapered bottom‐line. Analyst from ADK Securities believes that  KEL may approach NEPRA for a Review, with specific aspects being highlighted.

Pakistan Stock Market remains laclkuster

Due to political uncertainty and regulatory pressures the benchmark of Pakistan Stock Exchange index remained unexciting. The week ending 17^th March 2017 closed at 48,409 points, down 1.6% WoW. Soft global oil prices, SECP’s action to curtail in-house badla financing and political uncertainty kept the market under pressure. Key news flows during the week were: 1) SBP raised Rs284 billion through short‐ term government papers, 2) in line with expectations, the US Fed raised interest rates, 3) in addition to independent power producers’ claims of over Rs414 billion, non‐payments to oil companies were reported at more than Rs300 billion, 4) Ministry of Finance approved payment of Rs6 billion on Thursday for the state owned PSO to avoid an international default, and 5) HUBC and FFC announced in separate notices the offer and receipt of an equity divestment plan relating to Thar Energy Limited. (TEL), a 330MW mine mouth coal fired project in Thar Block II. Stocks leading the bourse were: MEBL, ASTL, FATIMA, and ICI. On the other hand, laggards were: HMB, PPL, and FFBL. Volume leaders were: KEL, BOP, TRG and ASL. Subdued global oil prices, strengthening US$ and global trade related developments over the upcoming G‐ 20 summit may impact the domestic markets. At home, any clarity on the political front could trigger bullish sentiment, while policies and budgetary developments for the Finance Bill FY18 can be expected to sway markets.

The PRK has remained stable over the last year, weathering the worsening external account position. While current account deficit is up 90%YoY during 7MFY17 and reserve position (down US$1.75 billion from its peak) has deteriorated, PkR/US$ has remained stable at PKR104.8/US$, which is reflective of GoP's resolve to keep exchange rate stable. Going forward, analysts see little pressure on the PRK over the short term, primarily supported by an expected recovery in forex reserve position. In this regard, analysts see support from expected inflows including: 1) up to US$1.0 billion from planned Eurobond/Sukuk issue, 2) US$550 million under CSF disbursement and 3) likely US$4.0 billion from project lending and commercial loans budgeted for the year along with room for greater accretion from CPEC related inflows. Incorporating this,

AKD Securities has recently revisited its investment case for PIOC, incorporating recent cement price increase and expected continuation of clinker sales. While rally in coal price is expected to shrink gross margins (GM) and dampen earnings, recently installed 12MW WHR is expected to partially make up for the above. In this regard, the brokerage house expects an after‐tax operational savings of PKR1.11/PKR1.82 in 2HFY17/FY18. Besides, the company revealed its plans of: 1) revising up its cement expansion capacity from 2.21 million tpa to 2.52 million tpa, 2) installing separate line of 12MW WHR for the expansion and (3) setting up 24MW coal CPP. The total capex associated with the projects is expected to be around PKR25 billion. Though, the brokerage house has not incorporated the aforementioned projects due to awaited details, it expects the expansion to result in increase in FY20‐23 average earnings. Moreover, the new line of WHR and coal CPP are together expected to result in incremental earnings.