Macro Analysis /
Pakistan

Pakistan Strategy - Defensive plays rattled by the amended Finance Bill 2022

  • National Assembly of Pakistan approves the unpalatable Finance Bill 2022 with large fiscal adjustments

  • Stopgap measures are applicable to 80% market capitalization of KSE100 index, denting June cash payouts

  • These measures will help re-track IMF as Pakistan moves to battle the twin deficit problem again in 4 years

Contributors
Ali Aziz Soorty
Abdul Ghani Mianoor
Rahul Hans
Intermarket Securities
1 July 2022

Pakistan’s tight fiscal position has resulted in the axe falling on the formal corporate sector. The amended Finance Bill 2022 reintroduces the recurring super tax of 4% and, for 15 sectors accounting for c.80% of KSE100 market capitalization, the super tax for 2022 is a hefty 10% (for companies earning more than PKR300mn). This tax change will potentially impact the expected payouts of several listed companies. However, the impact on recurring payout capacity is modest.  These measures will help re-track IMF as Pakistan moves to battle the twin deficit problem again in 4 years.

There has been a category shift from Poverty Alleviation Tax to Super Tax which taxes high earnings of more than PKR150mn; highest tax bracket of 4% for more than PKR300mn income. A good slice of earnings will not be realized, impacting expected payouts of listed entities for the quarter ending this June as a one-off high rate of 10% super tax is applicable, amongst other measures.

Nearly 80% of market valuation is affected by super-tax

The new corporate taxation measures affect nearly 15 sectors in the listed space, representing c.80% market capitalization of the KSE100 Index. These sectors include, Airlines, Automobiles, Beverages, Cement, Chemicals, Cigarette and Tobacco, Fertilizer, Iron and Steel, LNG terminal, OMCs, Refineries, Oil & Gas Exploration, Pharmaceuticals, Sugar and Textiles. We estimate that the lowering of payout capacity will reduce the expected dividend yield from 10.3% to 9.6% for FY23f. Forward dividend yield still stands attractive despite a quarter’s dent.

Amongst the super-tax-affected sectors, Banks are also faced with an enhanced corporate tax rate of 39%, although this is not as high as previously feared . Our preference remains for margin-sensitive banks with more than 50% loan-deposit ratio. Banks meeting this criteria are MEBL, BAFL and BAHL. Simultaneously, a leading fertilizer player has increased selling prices which enhances the likelihood of recovery of non-refundable tax claims and input taxes, going forward. This puts a few names, FFC and EFERT, as a key beneficiary to be able to offer more than 20% annual dividend yield, if the price hike is not denounced by authorities.

Better transmission of policy settings through fiscal changes

We believe, the transmission of fiscal policy is more direct as compared to a monetary policy rate hike, since Pakistan is not a leveraged economy. Hence, the key change in salary taxes along with higher corporate taxation will likely sober demand growth.

Despite SBP’s enhanced net forex selling in interbank market to overcome currency devaluation which has reduced Net Foreign Assets by PKR1.9tn during FY22TD, the new monetary targets, post Budget FY23 conclusion, will seek thresholds over the course of NFA-related monetary impacts on money supply. We reiterate our stance of a 100bps policy rate hike in the upcoming MPS announcement on 7th July, which will likely be able to level up with the fiscal adjustment of PKR1.6tn of 10th June and another round of c.PKR460bn adjustment in the revised Finance Bill 2022.