The fiscal budget for year 2008-09 presented by the Finance Minister, Naveed Qamar has been termed by the economist and analysts as the “responsible budget” in the current situation that remains investor friendly despite fiscal pressures.
The coalition government has opted to continue the growth theme, live with higher inflation and tried to mitigate its impact on the fixed income & poorer segments of the population, says a report by AKD securities.
The Budget is positive for the stock market because the imposition of Capital Gains Tax has been exempted for next two years. The decision to exempt the capital market from the tax was taken in meeting of stock market delegation and co-chairman of Pakistan Peoples Party PPP, Asif Ali Zardari before the announcement of budget. Measures related to agriculture sector, housing, textiles, industrial raw materials are generally positive for the corporate sector.
The AKD report says, “The Budget did not have any negative surprises. It will translate into positive sentiments in the first instance and likely enable a market rally in the near term. Beyond that, sustainability will depend on the political environment and economic performance over the next few months”.
Analysts expect that in response to the budgetary measures, agriculture and services sectors would be the primary growth drivers in the next fiscal year, growing by 3per cent and 6.1per cent, respectively.
Pakistan can achieve substantially improved agricultural performance, given the ongoing international soft commodity boom, which is likely to continue for at least the next 12 months. Emphasis is now giving on improving crop yields in order to cash-in on high international soft commodity prices. Pakistan is expected to benefit from increased investment in crop and livestock sub-sectors, which would help achieve higher agricultural growth and reduce reliance on expensive imported food commodities. During last outgoing fiscal year major crops in agriculture sector registered a negative growth of 3 per cent.
Industrial growth might be limited to 5.2per cent on the back of power shortages, capacity constraints and high input costs. Industrial sector growth is likely to remain subdued over the next 12 months due to sharply higher input costs and existence of numerous production bottlenecks, electricity shortages being the prime. This would most likely diminish growth to 4.5per cent in the manufacturing sub-sector, which has a sectoral weight of 71per cent.
An excessively tight monetary policy might negatively affect growth in the financial sub-sector by depressing domestic consumption & loan growth, an anticipated pickup in agri-production and continued high import demand will most likely support growth in the Wholesale & Retail sub-sector which has a significant weight of about 36per cent in the services sector. Analysts have separately reviewed the budgetary impacts on the listed sectors.
Power Sector: Analysts believe that Rs66 billion allocated to the power sector would strengthen the cash flows of Wapda, which would help sustain the financial health of Independent Power Producers (IPPs). Besides, exemption from customs duty on rental power plants will facilitate the addition of generation capacity to the national grid.
Fertiliser Sector: Increase in DAP subsidy, abolishment of sales tax and other pro-farmer incentives should benefit the sector directly or indirectly. Concerns associated with falling DAP sales are likely to have been addressed to a great extent through increase in subsidy, while abolishment of General Sales Tax should benefit both the farmer as well as manufacturers, provided the latter fully exercise their significant pricing power.
Banking Sector: The budget has not proved burdensome for the banking sector, as was initially expected. However, liquidity constrains could arise following National Saving Scheme (NSS) rates being revised upwards by 2per cent while a potential positive in the shape of allowance of deduction of NPLs classified as Doubtful and Loss has been struck down. In light of accumulation of negative sentiment regarding the banking sector in the run-up to the budget announcement, a positive sentiment-driven rally could take shape.
Insurance: The measures introduced in the Federal Budget FY09 will have a neutral impact on the non-life insurance sector of Pakistan. The 5per cent withholding tax (WHT) on reinsurance premium paid to overseas reinsurance companies will be neutralized. The inelastic demand in the industry would enable the non-life insurance companies to pass on the WHT impact in the form of higher premiums.
Cement: The PSDP allocation of Rs549bn along with the allocations for roads and dam development, and low-income housing projects should drive a positive correlation with local demand for cement. However, keeping in mind the historical perspective, Analysts believe actual utilization of PSDP over the year will be the eventual determinant for a boost in local cement consumption. The increase in excise duty by Rs150/ton should not be a concern if the cost is passed through in local retail cement prices, leaving the retention price unchanged.
Telecom: The FY09 Federal Budget is likely to have a marginally negative impact on the telecom sector, through increase in excise duty, sales tax and imposition of Rs500 duty per unit on the import of mobiles sets. However, in a mature telecom market where teledensity has already crossed the 50per cent mark, any increase in taxation can be easily passed on to end consumers through an inelastic demand for telecom services.
Textile: As expected, the animated requests of the textile sector were not introduced in the FY09 Federal Budget. However, the measures introduced are likely to bode well for the textile manufacturers, as reduction in duties on raw material will likely have a favorable impact on margins.
Oil Marketing: The budget finally provided a sigh of relief for midstream and downstream oil companies with no change in the POL product pricing formula and margin mechanism. The only development includes exemption in duty on JP4/JP8 and a cut in duty rate to 10per cent from 20per cent on base oil for lubricants. With the GoP targeting lower subsidies, domestic POL price revisions are likely to boost earnings through products with an expanding margin base.
Exploration and Production: The Federal Budget as widely expected carried no significant mention of the exploration and production sector. This puts to rest any concerns over regulatory risks and keeps the aims of the new policy intact going forward. Post budget subsiding of regulatory risks generates a positive impact on the sector.
Government has announced 5.5 per cent growth target of GDP for the upcoming fiscal year while inflation target is set at 12 per cent against 11 per cent of the current fiscal year. Analysts say that the inflation is unlikely to be tamed in the next fiscal year mainly due to the increasing oil prices both at domestic and international markets and commodity prices. On the other hand political situation of the country is still not clear because of the coalition government’s inability to restore deposed judges.
