Economic activity remained stable in October, as fuel supply was managed through the QR system. Heavy rains also supported electricity generation, which supported fewer power disruptions during the month. A key highlight was the Government’s revenue generating policy measures introduced during the month. While these are not yet finalised owing to a petition against the tax increases, we expect these to be finalised ahead of the 2023 budget reading expected in November. While higher revenue generating policies are a positive, we maintain our view that the govt needs to focus on SoE restructuring, including guaranteed debt, while the domestic debt restructuring will be a last resort. Against this backdrop, inflationary pressure continued to slow down MoM, with headline inflation reaching 69.8% YoY in September. We maintain our 2022 GDP expectations of a 7.5% - 9.0% YoY contraction. We emphasise that a strong reform plan and a stable political backdrop is key to mitigating the economic impact.
Government tax proposals to support IMF discussions; negative impact on consumer spending power
Overall, the tax proposals are a positive indication to the Government’s efforts to reduce the fiscal deficit to 9.8% of GDP in 2022. While the higher personal income tax and lower tax-free allowance will support revenue collections, we note that this will have a negative impact on real per capita expenditure. We also factor in an elevated inflationary environment in 2023, compared with pre-2022 levels, which will further erode real per capita spend. While we note that these measures are not yet implemented, we expect a majority of the taxes announced to be finalised in the near term.
Mobility levels remain steady during the month; Manufacturing, Services PMIs show mixed results
Mobility levels across sub-groups remained steady during the month, with footfall around workplaces returning to positive territory for the first time since March’22. This was mainly due to more corporate offices readopting in-office work compared to hybrid work owing to continuous fuel supply and shortened power outages. Footfall into retail stores and pharmacies also remained in positive territory. In terms of PMI data, this showed mixed results in September, with the Manufacturing PMI indicating a contraction and the Services PMI recording an expansion for the month.
Inverted yield curve indicates higher short-term risk; yields look to ease in the near-term, with govt revenue generating policies
The surge in demand for government securities seen over the past few months continued to taper down to some extent in October. Notably, the CB did not fully subscribe to the amounts offered during auctions, which in our view, indicate the higher bids by investors. However, a notable positive shift was seen in foreign holdings of Government securities which recorded inflows. This comes amidst an increase in yields seen over the past weeks, specially 3-month yields which are now at 33.05% (compared with 31.94% by end September), as investors factored in a possible local debt restructure.