EUR 22.80 For Business Accounts Only

Intermarket Perspective - Federal Budget FY19 - Popular and ambitious

Federal Budget FY19

Popular and ambitious

The PML-N government’s 6th Federal Budget, since its came to power in 2013, understandably has a populist tilt to it, given there are only a few months to go until General Elections. There is clear support for the Agriculture sector where more than 60% of the population resides in rural areas. There is also acknowledgement that more needs to be done to revive exports which could lead to an extension of the Exporters Package going forward. That said, we see tweaks being made to this Budget as the year progresses where fiscal deficit target of 4.9% of GDP appears too ambitious, GDP growth target of 6.2% demands a lot from manufacturing growth and weak import cover (currently<2.5m) will likely again lead to an IMF program.

For the stock market, there are clear positives. Although CGT has seen no change and inter-corporate dividends ostensibly continue to face tax, steps to eliminate bonus tax and reintroduce advance adjustable WHT on brokers are definite positives. At the same time, measures to improve tax collection in the property sector may potentially see some funds flow towards capital markets which could also serve to boost the KSE-100. On balance, we see the Pakistan market cheering the Budget come Monday even though some announced measures were widely expected.

For the corporate sector, overarching steps are mainly positive. While Super Tax will continue for the next few years (at 3% for companies and 4% for Banks), it will be progressively reduced by 1ppt per annum and eventually eliminated. There are significant reductions in corporate income tax as well; after reducing from 35% in the last few years to 30% at present, companies will now see a 1ppt per annum reduction where the tax rate is envisaged at 25% by FY23. Lower corporate income tax rate will counter impact of continuing super tax, especially for non-bank companies. Further steps such as (i) extension in tax credit on BMR activities and (ii) lower threshold for minimum profit distribution are also encouraging for growth-oriented companies. 

Sectors with a positive impact include: Fertilizer, Textiles, Consumer & Chemicals.

Sectors with a negative impact include: Autos, Banks, Cements.

We have incorporated the revised corporate taxation regime (including gradual phase-out of super tax) in our financial models and Target Prices in this document reflect the same. With banks continuing to facing a flat 35% income tax rate, imposition of super tax over the next few years results in TP cuts. Non-bank companies witness a lift in their Target Prices, all else the same.