Macro Analysis /

Pakistan Budget – Structural reforms are coming through

    IMS Research Team
    Intermarket Securities
    12 June 2019

    The first full Budget under the PTI government initiates the promised structural reforms, with a significant focus on widening the tax net, and large disincentives for unproductive activities such as the trading of immovable properties. This is a clear demonstration that the government is now taking the tough steps that are needed to set Pakistan’s economy on a more sustainable footing. The government will face pressure - especially from non-filers (now prosecutable) and the real estate lobby - but it is important it stays the course. The move to restrict the government’s power to grant ad hoc tax exemptions going forward is a step in the right direction.   

    FY20 will be a year of economic consolidation, admitted to by the state minister for revenue, who presented the Budget. This is reflected in the conservative macroeconomic targets that have been put out for FY20, with GDP growth at just 2.4% (the lowest in more than a decade) and inflation of 11-13%. We believe there is room for positive surprises on both fronts and, while the FBR tax collection target of PKR5,555bn (+ c 35%yoy) is ambitious, we are encouraged by the push to widen the tax net and plug leakages.  

    The corporate sector sees some measures that will result in a cut to earnings estimates. These include keeping the corporate tax rate at 29% (for non-banks), in contrast to a phased 1ppt reduction to 25% announced by the previous government. On balance, however, we believe that budgetary measures are less punitive on listed sectors than earlier feared. Instead, the stock market may even see improved local funds flow, particularly if money shifts from the property market. With the IMF’s pre-program conditions also now seemingly out of the way, and greater clarity in place, we expect investor confidence - both local and foreign - to improve and drive better market performance in 2H19.   

    Sectors with a neutral impact include: Fertilizer, Power, E&P, Technology, Cements. Pharmaceuticals see a positive impact. 

    Sectors with a negative impact include: Autos, Banks, OMCs, Steel

    We have incorporated the revised corporate taxation regime in our financial models and make some adjustments to our target prices in this document reflect this. However, we do not make any changes for Banks, where we see only a minor impact from the imposition of a 37.5% tax rate on incremental income on government securities.