JS Securities Limited – FY20: The known unknown

Karachi, June 12, 2019 (PPI-OT): Federal Budget Commentary

The main highlights of the FY20 budget are as follows:

The exorbitant tax target is the main theme of the FY20 Budget. Documents reveal that Sales Tax, Income Tax and Customs Duties are expected to contribute approximately 44%, 30% and 19% respectively to the additional revenue of Rs1,405bn (34% increment over FY19).

Primary deficit is another hot topic ahead of the budget. IMF seems to be fully cognizant of the gravity of our debt obligations: almost half of the FY20 budgeted current expenditure will have to be spent on interest payments on debt (which are 45% higher than in FY19).

In the same context, if we keep aside interest payments, we are left with two choices to manage public finances: increasing revenues or cutting expenditures. It seems that the expenditure side has seen no material control. For instance, there has been a 74% increase in grants, which will set the government back Rs353bn. The PSDP target has been set at 701bn (with claims of an additional ~Rs224bn to be raised through “innovative financing”) against Rs500bn in FY19. While the Defence budget has seen no increments, it is already at historic highs. It is also worth mentioning that while civil expenditures have been cut through salaries, it begs one to wonder the overall impact of a few salary cuts.

With respect to privatization, Mr. Hammad Azhar categorically stated in his speech that US$2bn would be raised from the sale of two LNG plants while over US$1bn would be raised through an international joint venture in Pakistan Steel Mill and renewal of telecom licences.

As far as financing the fiscal deficit goes, privatisation proceeds of Rs150bn (~US$1bn) would be used. Moreover, external financing will outweigh domestic sources in terms of financing the fiscal deficit, as per budget documents. Within domestic borrowings, there will be more reliance on non- banking sources and the recent uptick in NSS flows is a reflection of the same.

Additional Customs Duties have been increased on non-essential items, which is a welcoming step. Nevertheless, we wish there were more concrete steps to curtail imports. Otherwise cutting the Current Account Deficit by half would be a daunting task.

Two frightful (but honest) revelations in the budget have been the 2.4% GDP growth target and the double digit inflation target (11-13%). Given that we have a history of missing both, the government could face serious political repercussions.

In terms of information, equity markets have crossed yet another milestone. However, the implications of the budget are yet to unfold. The above two projections are alone enough to paint a picture of the times to come.

Prime Minister Imran Khan addressed the nation late into the night where he delivered his signature speech with some additions, the most noteworthy being setting up a high powered commission to enquire the enormous debt accumulated in the past decade.

In our view, the best of the budget was seen in the Real Estate sector. In an unprecedented move worthy of applause, the sector has undergone a paradigm shift. Revision of the official valuations, extension of the holding period for applicability of the Capital Gains Tax and, most importantly, requirement that transactions over Rs5mn be carried out through banking channels are all steps that could go a long way. Nevertheless, we hope and pray that the government does not backtrack on these measures.

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