Macro Analysis /

Pakistan Budget: Reforms commence with revised FY19 Budget

    Intermarket Securities
    18 September 2018

    Finance Minister Asad Umer has just announced a revised Budget. With much needed policy clarity coming through - the government yesterday announced a hike in gas tariffs – the KSE 100 has rebounded and is up more than 1.5% as we write. Question marks on the external a/c situation remain (import cover is just 2 months), but this is a welcome start to macroeconomic reforms under the PTI government.

    While we await details, initial takeaways include:

    • Fiscal deficit stands at 6.6% of GDP, necessitating adjustments to the FY19 Budget announced by the PML-N government in April’18. Revised measures will raise an estimated PKR183bn in revenue i.e. 0.5% of GDP. 
    • Construction: The Budget announced in May’18 earmarked PKR1,030bn for federal PSDP, including PKR230bn to be raised from public-private sources. As per the new Budget, development expenditure is targeted at PKR725bn (PSDP component: PKR500bn) vs. last year’s disbursement of PKR661bn. An amount of PKR4.5bn has been earmarked for construction of housing for the underprivileged segment (8,276 houses) while non-filers can now buy property of more than PKR4mn. With cuts to development expenditure not as steep as expected, and initial plans becoming visible on the PM’s low income housing scheme (5mn houses over 5yrs), the Cement and Steel sectors are depicting a rally. Our preferred cement stocks are LUCK, MLCF and KOHC. Among steel producers, we like ASTL and ISL best. 
    • Autos: Non-filers will now be allowed to purchase cars while luxury cars of 1800cc or more will see FED double to 20%. The former is positive for all Autos manufacturers especially INDU and PSMC. 
    • Pharmaceuticals: After seeing success in Khyber Pakhtunkhwa, the Sehat Insaf Card program will be extended to FATA and Islamabad, and later to Punjab. This program entails an amount of PKR540,000 (US$4,320) per family per annum to pay for medicines and doctor’s bills. This should be positive for Pharmaceutical companies where we like AGP best. 
    • Fertilizer: An amount of PKR6-7bn has been earmarked for urea import as well as provision of gas to enhance local production. In general, we see constrained pricing power for the Fertilizer sector where we would look to book profits on strength.  
    • Consumer: Miscellaneous changes include: (i) increase in personal tax rates for those earning more than PKR200,000 per month, (ii) 10% increase in EOBI pensions, (iii) increased taxation on cigarettes and (iv) increased duties on multiple luxury items (details awaited) including high-end mobile phones.