EUR 21.44 For Business Accounts Only

Pakistan Budget FY20 Preview

• Budget FY19-20 will most likely be presented on terms and conditions of IMF to bring the economy back on the right track and will likely focus on fiscal discipline.
• The upcoming budget will not bring any major excitement for the stock market, we believe. Rather it will be negative, especially for cyclical sectors (Cement & Steel), Fertilizer and Chemical if key measures like continuation of corporate tax rate at 29%, re-imposition of super tax for non-financial companies, increase in excise, GST and turnover taxes among others are implemented.
• Higher tax revenues of 3.5% of GDP (to the tune of Rs1.4-1.5tn) would be key highlights of the budget. However, we are of the view that Govt. may not be able to achieve the budgeted revenue targets given continued economic slowdown.
• We believe, that in order to bring the fiscal deficit to 5.5-6.0%, the Govt. will likely cut development expenditure to Rs1.2tn-1.3tn from FY20 budgeted amount of Rs1.8tn. Further, we may also see downward revision in other current expenditures like subsidies, and social safety program along with obtaining surplus from provinces (mainly Punjab and KPK).
• We believe incremental tax measures can include, increase in GST by 1ppt to 18% across the board, increase in FED on select items, hike in additional custom duties, increase in regulatory duties on imports of consumer discretionary items, uniform taxation for petroleum products and revenues from amnesty scheme among others.
• If above measures materialize, they may likely keep Topline Universe earnings growth flat versus our previous estimate of 11% at start of 2019. This may prompt us to revise down our KSE-100 index target for Dec 2019 to 38,000-42,000 vs. previous 40,000-45,000.
• We continue our liking for cash rich companies, select Banks, E&Ps and Textile which will benefit from current monetary tightening environment, and higher rupee dollar parity.