fy19 budget previe...april 20, 2018 rep‐057 pakistan equity| economy update fy19 budget preview...

April 20, 2018 REP‐057

Pakistan Equity| Economy Update

dFY19 Budget PreviewLikely impact on stock market and key sectors

Topline Researchh@t li k

Best Local Brokerage HouseBrokers Poll 2011 14 2016 [email protected]

Tel: +9221‐3530‐3338‐40Topline Securities, Pakistan www.jamapunji.pk

Brokers Poll 2011-14, 2016-17

Best Local Brokerage House 2015-16

Table of Contents

Executive Summary -------------------------------------- 3

Stock Market – Expected Measures & Impact -------------------------------------- 4

Sector Impact and Analysis -------------------------------------- 8Sector Impact and Analysis 8

Stock Market Outlook -------------------------------------- 14

Populous Budget ahead of elections -------------------------------------- 16

Budget At a Glance -------------------------------------- 21

Pakistan Key Macro Indicators -------------------------------------- 22

Honda Atlas Cars (HCAR)Pakistan Budget Preview 2

Executive Summary

The recent Tax Reforms Package where the salaried class was given significant relief has set the tone of expectations of

further relief in upcoming budget. Beside tax relief ahead of elections, economic growth, improvement in investment

climate and populous measures are likely to remain key areas of focus for the Govt.

However we believe that tax and other populist measures could potentially be reversed or revised after generalHowever, we believe that tax and other populist measures could potentially be reversed or revised after general

elections as the new Govt. will want to set realistic targets amid external account concerns. Moreover, we expect

Pakistan to get into another IMF program in 2H2018, which is usually followed by shrinkage in fiscal balance.

We expect the govt. to rationalize the Capital Gains Tax (CGT) on sale of shares for tax filers along with specific holdingWe expect the govt. to rationalize the Capital Gains Tax (CGT) on sale of shares for tax filers along with specific holding

period.

The Govt. may also withdraw the 5% tax on market price of bonus shares in Federal Budget FY19.

We expect corporate tax rate of 30% to be maintained in this year’s budget. We expect the Govt. to continue with 3% of

super tax (4% for banks) in this budget as well.

Real estate measures announced in the recently announced Tax Reforms Package are expected to be part of Finance

Bill. This will help bring unaccounted for wealth in the economy that will have positive implications to other sectors

including stock market.

Sector wise Consumer, Chemical, Pharmaceutical and Fertilizer may be the beneficiaries of the budgetary measures.

Going forward, local politics (Former Prime Minister Nawaz Sharif’s court cases), smooth transition of democratic

f l d h d l i i ill lik l h f P ki


govt., success of recently announced amnesty scheme, and external account situation will likely set the tone of Pakistan

equities.

Stock Market – Expected Measures & Impact

C it l G i T (CGT) b ti li dCapital Gains Tax (CGT) may be rationalizedPakistan Stock Exchange (PSX) has proposed that CGT rate should be reduced to 10% if holding period is less than 6months and 8% for securities holding period between 6 to 12 months. PSX has proposed no CGT for securities havingholding period of more than 12 months.g pFor the current tax year FY18, the Govt. is charging fixed rate Capital Gain Tax (CGT) of 15% (for filers) irrespective ofholding period for stocks bought on or after July 1, 2013. For non‐filers, current CGT is at 20% irrespective of holdingperiod on stocks bought on or after July 1, 2013.

h d h d f f l l h f h ld d l f fWe expect the govt. to reduce the CGT tax incidence for filers along with specific holding period. However, relief fornon‐filers may not be forthcoming given the govt.’s continued focus on increasing number of filers, which remainaround only 1mn. Tax relief on filers could bode well for the market.

Stock Market: Historical CGT rates over the yearsStock Market: Historical CGT rates over the years

Tax YearRate of Tax where holding Period is

<6m > 6m but < 12m <12m 12m or more but <24m 24m or more* 2013 10.0% 8.0% ‐ ‐ ‐2014 10.0% 8.0% ‐ ‐ ‐2015 12.5% 12.5% 12.5% 10.0% ‐2016 15.0% 15.0% 15.0% 12.5% 7.5%2017 15.0% 15.0% 15.0% 12.5% 7.5%2017 (Non‐Filers) 18.0% 18.0% 18.0% 16.0% 11.0%


2018 15.0% 15.0% 15.0% 15.0% 15.0%2018 (Non‐Filers) 20.0% 20.0% 20.0% 20.0% 20.0%Source: Finance Bill 2017‐18; * Holding period is 24 months or more, but the security was acquired on or after 1st July, 2013

Stock Market (contd.)

Tax on bonus shares may be reducedTax on bonus shares may be reducedEver since the imposition of 5% tax on market value of bonus shares/ stock dividend in FY15 budget, there has been a majordecline in announcement of bonus shares by listed firms. In FY16 and FY17 total tax collected amounted to only Rs589mn andRs1bn respectively, according to PSX calculations. PSX further estimates that total bonus issues in terms of value reduced toRs4.4bn during Jan’17‐Jan’18 from Rs19bn in FY14. Similarly, number of companies issuing bonus shares declined to 35 duringRs4.4bn during Jan 17 Jan 18 from Rs19bn in FY14. Similarly, number of companies issuing bonus shares declined to 35 duringJan’17‐Jan’18 from 71 in FY14 as a result of the same measure, as per the workings made by PSX.Keeping in view reduced revenues and bonus issue, Securities and Exchange Commission of Pakistan (SECP) has also proposedto levy the current tax rate on the face value of bonus issue.We believe there are chances that the Govt. may withdraw the 5% tax on market price of bonus shares in Federal Budget FY19or will change it to be levied on face value.Historically Banks like Habib Bank (HBL), Allied Bank (ABL), Askari Bank (AKBL), Bank Al Habib (BAHL), MCB Bank (MCB), MeezanBank (MEB) and National Bank of Pakistan (NBP) used to issue bonus shares before FY15. Further, other companies like AttockCement (ACPL), Arif Habib Corp (AHCL), Atlas Honda (ATLH), Engro Corp. (ENGRO), Fauji Fertilizer (FFC), GlaxoSmithKline(GLAXO) IGI H ldi (IGIL) M i P l (MARI) P ki P l (PPL) P ki S Oil (PSO) S i N h (SNGP) d(GLAXO), IGI Holdings (IGIL), Mari Petroleum (MARI), Pakistan Petroleum (PPL), Pakistan State Oil (PSO), Sui North (SNGP) andThal Limited (THALL) to name a few used to issue bonus shares.

Corporate tax likely to be maintained; Super Tax may stickWe expect corporate tax rate of 30% to be maintained in this year’s budget. The govt. back in FY15 as part of its strategy startedgradually reducing the corporate tax rate by 1% to bring it down to 30% from 35%.The govt. in its recent tax reform package included reduction in maximum tax rate for individuals to 15% from a maximum of30%. We do not expect such measures for corporate sector as the govt. will otherwise be constrained for revenues.We expect the Govt. to continue with 3% of super tax (4% for banks) in this budget as well, despite few companies taking stayd i t th

Honda Atlas Cars (HCAR) 5

order against the same.However, we have not assumed super tax in our forecasts. If the govt. opts to impose super tax, it will affect our universe’searnings by 3% while our banks’ earnings will be impacted by 4%.

Pakistan Budget Preview


Tax on dividend income to remain unchangedTax on dividend income to remain unchangedThe govt. increased the incidence of tax on dividend on filers from 12.5% to 15% in last federal budget. Weexpect this to be maintained in upcoming budget. Tax on dividend income for non‐filers is also expected toremain unchanged at 18%.

Tax credit on enlistment of company on the stock exchangeCurrently, there is a 20% tax credit for new listings on PSX for 2 years while this reduces to 10% during the 3rdand 4th year. In order to encourage enlistment of companies on PSX, PSX has proposed to increase the tax creditto 20% for 5 years We anticipate the tax credit could be slightly increased to encourage listingto 20% for 5 years. We anticipate the tax credit could be slightly increased to encourage listing.

Tax on brokersAdvance Withholding Tax (WHT) collected from stock brokers is 0.02% of the value of purchase and sale ofsecurities and was made final tax liability in last year’s budget. PSX has recommended to reduce this tax liabilityon brokers to 0.005%. There are chances of this tax to be reduced also thus helping the market volumes thatcame down 50% in FY18 to date.

Real Estate Investment Trusts (REITs) may be given some tax reliefPSX has proposed following amendments in taxes related to REITs: 1) profit and gains accruing on sale ofPSX has proposed following amendments in taxes related to REITs: 1) profit and gains accruing on sale ofimmovable properties to both REIT (Development & Rental) be given tax exemption up to 2025. Currently, thisexemption is only restricted to Development REIT Scheme; 2) REITs to be classified as stock fund rather thanmoney market or fixed income funds (current practice), which would result in lower tax on dividend of 10%(f i 12 5%) W b li h b l b id d h h b f h REIT


(from previous 12.5%). We believe the above proposals may be considered as there have been no further REITlistings after Dolmen City REIT (DCR), due to these issues.



Minimum turnover taxMinimum turnover taxFederation of Pakistan Chambers of Commerce & Industry (FPCCI) has urged that upcoming budget shouldinclude reduction of turnover to 1% (from 1.25%) and that loss making enterprises be exempt from such a tax.This measure if proposed in budget will provide relief to mostly Textile companies that are in losses.

Tax on margin financingIt is proposed to reduce the rate of WHT on the gross income earned on Margin Financing System (MFS) from10% to 2.5% or the directly attributable expenditure incurred to earn income from MF transactions be allowedas admissible expenditureas admissible expenditure.

Group taxation – Inter corporate dividendIn order to promote group formation and consolidation in Pakistan, it has been proposed to exempt groupcompanies (provided the holding company holds 55% or more stake in one of the listed companies or in case of

)no listed company in the group, the holding company shall hold 75% or more stake) from paying tax on inter‐corporate dividend. We believe that the Govt. might approve this proposal as it was already in place beforeFinance Act 2016. If approved, select holding companies like Engro Corp (ENGRO), IGI Holdings (IGIL) andKohinoor Textile Mill (KTML) will have earnings impact of 6‐8%, we estimate.

Tax on undistributed reservesIn Finance Bill 2017, government continued tax penalty of 10% on undistributed reserves of the publiccompanies other than banks and modarabas whose reserves were higher than paid up capital. This clausecreated obligation on various listed companies (especially cement sector) to pay dividends to their shareholders


created obligation on various listed companies (especially cement sector) to pay dividends to their shareholders.Currently, various business lobbies (Pakistan Business Council and OICC) and institutions like ICAP haverecommended government to remove this measure.



C P iti It h b d d t t d i d t t 5th h d l f th S l T A t 1990Consumer Positive It has been recommended to re‐transpose dairy products to 5th schedule of the Sales Tax Act 1990and resume zero rating facility for the dairy sector. Although likelihood of this happening is low, ifhappens, it will lower the cost production of packaged producers, in our view.

An annual quota system for the import of milk powder/ dry milk has been suggested which will bebased on volume of fresh milk purchase from farmers This will be positive for the formal dairy sectorbased on volume of fresh milk purchase from farmers. This will be positive for the formal dairy sectoras any reduction in duty on imported milk will benefit packaged producers, especially tea‐whiteners asimported milk constitute significant portion of their raw materials.

The Govt. has decided to give tax relief to salaried class in the recently introduced Foreign/Domesticamnesty scheme. We believe that lower income tax rates should increase consumers’ spendingamnesty scheme. We believe that lower income tax rates should increase consumers spendingpower, thereby leading to higher sales for consumer firms.

There are also talks of removal of RD on inputs of appliances which could have material impact onlocal manufacturers like Pak Elektron (PAEL).

D ties on ario s chemical prod cts like Carbon dio ide H drochloric Acid Sodi m H dro ide arePositiveChemicals Duties on various chemical products like Carbon dioxide, Hydrochloric Acid, Sodium Hydroxide arebeing proposed to be reduced.

While there is low probability of GIDC removal, if happens, companies like Lotte Chemical Pakistan(LOTCHEM) and Engro Polymer and Chemicals (EPCL) may see positive earnings impact of 10‐15%, weestimate.

PositiveChemicals

It has been proposed to reduce rate of duties (customs duty, additional duty & regulatory duty) andbring rate of sales tax to zero percent on the import of active pharmaceutical ingredients(APIs), products and recipients.

The same has been recommended on the import of plant & machinery to manufacture pharma

PositivePharma

Honda Atlas Cars (HCAR) 9Pakistan Budget Preview

The same has been recommended on the import of plant & machinery to manufacture pharmaproducts, equipment and software for quality control.

Above measures, if approved, will lower input cost of pharma companies, we believe.


Th f tili i d t h d th t t b li h/ d GIDC f d i t d fP itiF tili The fertilizer industry has urged the government to abolish/reduce GIDC on feed gas instead ofoffering subsidy to benefit both farmers and industry. In case of continuation ofsubsidy, manufacturers have recommended to speed up the process of subsidy collection. We believelikelihood of GIDC reduction is high as Govt. is not able to collect due amount from manufacturers ascompanies have taken stay orders from the courts

PositiveFertilizer

companies have taken stay orders from the courts.

On every Rs50 per bag reduction in GIDC and assuming benefit retained by industry, Fauji Fertilizer(FFC) would be better off by ~Rs1.38/share, Fauji Fertilizer Bin Qasim (FFBL) by ~Rs1.4 and EngroFertilizer (EFERT) by Rs0.5/share.

Fertilizer industry is currently paying input GST of Rs114/bag (10% on feed and 17% on fuel) whileFertilizer industry is currently paying input GST of Rs114/bag (10% on feed and 17% on fuel), whileoutput tax collection by urea manufacturers is Rs70 per bag (5% of urea price), resulting into taxrefunds. On the other hand amount of subsidy payment is also delayed by the Govt. We believe, theproposal related to immediate release of sales tax refunds and subsidy is unlikely to be entertained bythe Govt.

Other recommendations includes: blanket approval of urea export, consistent supply of gas to SNGPLbased urea plants (Agritech, and Fatima Fert) and subsidy on RLNG used for urea production. Weopine, continuous gas supply to SNGPL based players is unlikely, keeping in view the scarce resources.

N t lT b A h G ill lik l i h hi d i d i i d dNeutralto

Positive

Tobacco As per news sources, the Govt. will likely retain the third tier duty structure on cigarettes, introducedin the last budget. The introduction of the third slab has resulted in FBR to not only collect FED bymore than 20% in FY18 year to date, but also led to decline in illicit trade of local tax evaded and non‐duty paid smuggled/ counterfeit cigarettes.


We believe that the continuation of third slab is likely as it has not only increased the Govt.’s revenuebut also brought down market share of illicit sector (a major hue and cry of the formal industry) to34.7% in Dec 2017 vs. 40.8% in Jun 2017.


Pakistan Automotive Manufacturers Association (PAMA) in its budget proposals has proposed some taxN t lA t Pakistan Automotive Manufacturers Association (PAMA) in its budget proposals has proposed some taxmeasures to reduce the cost of locally produced vehicles and make these more affordable to consumers.According to PAMA, the 1% additional duty is negatively impacting the highly cost‐sensitive sector.Moreover, 5% to 30% regulatory duty on steel being imported under HS codes72.08, 72.09, 72.10, 72.13, 72.14, 73.05 and 73.18 has been imposed. These steel items are basic raw

i l f h i d h b i f d l ll d i d i i i f h

Neutral to

Positive

Autos

materials of the auto industry that are not being manufactured locally and continued imposition of RD at sucha high rate is unbearable as it increases the per vehicle cost by Rs3,000 to Rs5,000.

Pakistan Automotive Manufacturers Association (PAMA) has proposed to reduce the rate of input tax ontractors manufacturers to match the output rate. Agricultural tractors are subjected to sales tax at the rate of5%, as against, components procured locally as well as imported are subjected to sales tax at the rate of5%, as against, components procured locally as well as imported are subjected to sales tax at the rate of17%, leading to accumulation of tax refunds.

We believe that above proposal is likely to be approved which will reduce input costs and improve theliquidity position of local tractor industry.

Government is mulling over removal of 5% GST on tractor in upcoming budget. This would be positive forGovernment is mulling over removal of 5% GST on tractor in upcoming budget. This would be positive fortractor manufacturer and their suppliers.

Pakistan Banks Association (PBA) has proposed FBR to reduce corporate tax for banks from 35% to 30% andhas also demanded not to extend 4% super tax to tax year 2019. We expect that the corporate tax rate forbanks will be maintained at 35% for banks while super tax may be extended for tax year 2019. In our

Banks Neutral

models, we have not assumed any super tax for 2019.

Currently, withholding tax rate on cash withdrawals of over Rs50,000 for non‐filers stands at 0.4% which maybe increased in upcoming budget as government is planning to penalize non‐filers. This could discourage cashwithdrawals however the impact is not expected to be very significant.


Govt. has been relying heavily on bank borrowings to finance its fiscal deficit. We anticipate governmentreliance on bank borrowings to slow down as IMF discourages borrowing from banking system.Furthermore, reform steps to tackle fiscal deficit issue could reduce government reliance on bank borrowing.


NeutralCement To restrict the budget deficit within target Govt will allocate more resources for ongoing projects and aNeutralCement To restrict the budget deficit within target, Govt. will allocate more resources for ongoing projects and alimited number of new projects will be made part of the next PSDP. For this, Finance Ministry hasproposed to set consolidated PSDP target of Rs1.76tn (Federal target at Rs750bn, down 25% YoY) asagainst Rs2.11tn last year.

This will not have a negative impact on cement demand in our view This is because the major portion ofThis will not have a negative impact on cement demand, in our view. This is because, the major portion ofcement consumption (~60%) comes from the Private sector.

We do not expect GIDC removal (if happens) to have material impact on the sector.

Federal Excise Duty (FED) on cement is expected stay the same. However, any increase will likely bepassed on to customers we believepassed on to customers, we believe.

To incentivize oil and gas exploration in the country, it has been proposed to reduce corporate tax rate onE&P sector to the rate applicable to other corporate sectors. We see low probability of this happening.

The Govt. is likely to set target of dividend income of Rs23.2bn (Rs8/share) from Oil & Gas Development

E&PS Neutral

Currently, there is no proposal under discussion for gas distribution companies in upcoming budget. Anyrevision in return formula and restructuring of gas companies will likely be considered post election and

NeutralGas

Distribution

Company limited (OGDCL). Similarly, it will likely target Rs17.3bn (Rs13/share) from Pakistan PetroleumLimited (PPL).

may take some time before it gets government approval.

Govt. in FY17 federal budget proposed that income of insurance companies to be subject to corporate taxrate of 30% in line with practice seen in Banking Sector. We do not expect any reduction in tax rate ofinsurance companies.

NeutralInsurance


Insurance premium are subject to 4% withholding tax on non‐life insurance for non‐filers whereas it issubject to 1% WHT for Life Insurance with premium over & above Rs300,000. WHT on the same could beraised further to penalize non‐filers.


Govt has vowed to reduce circular debt to curtail load shedding ahead of election by gradually clearingOMCs Ne tral Govt. has vowed to reduce circular debt to curtail load shedding ahead of election by gradually clearingdues to power sector that is likely to reduce receivables and cash flow constrains faced by Oil MarketingCompanies.

Govt. is likely to receive Rs1.5bn of dividend income from Pakistan State Oil (PSO) as Govt. has 22.5% ofdirect holding in the company.

OMCs Neutral

g p y

NeutralTextile All Pakistan Textile Mills Association (APTMA) has recommended the government to reduce cost of energythrough withdrawal of power surcharge (~Rs3.5 per unit) in coming budget to enable Pakistan’s exportcompetitiveness in terms of its regional peers.

Similarly, gas price should also be brought at level of regional peers. RLNG users in Pakistan are payingSimilarly, gas price should also be brought at level of regional peers. RLNG users in Pakistan are payingUS$11/mmbtu vs. regional peers cost, India (US$4.5/mmbtu), Bangladesh (US$3/mmbtu), and Vietnam(US$4.2/mmbtu).

We believe, removal of power surcharge is unlikely as the government has already adopted cheaper fuelmix (coal and LNG) for power generation, resulting into lower energy tariff.

ABAD has proposed removal of RD on mild steel bars to safeguard construction sector as rebars areNeutralSteel

Further, association has also recommended withdrawing 5% regulatory duty on import of polyesterfilament yarn, a raw material used in polyester fabric industry.

If GIDC is removed, textile companies will not have material impact.

ABAD has proposed removal of RD on mild steel bars to safeguard construction sector as rebars areessential component for the construction industry. FBR had imposed RD on steel imports to stem thegrowing trend of steel imports at the time rebar in international market was trading at US$220. Howeverwith rise of international prices to US$650/ton, the cost of construction has increased exorbitantly, whichneeds to be curtailed.

Neutral to

Negative

Steel


It has been proposed to remove regulatory duties on billet, rebar and wire products, CRC, HRC and othersteel products.

We believe that the Govt. might mull over the above proposals.

Stock Market Outlook

Short term rally likely – Market on average has gained 2.8% before Budget since FY12Rationalization of CGT, low tax on bonus shares and likely reduction on tax on trading may trigger a short term

rally post Budget.

After that, local politics (Former Prime Minister Nawaz Sharif’s court cases), success of recently announced

amnesty scheme and external account situation will likely direct the share price trend.

We continue our liking for select Banks, E&Ps and Textile which will benefit from expected hike in interest

rates, currency devaluation and higher oil prices.

Sector wise Consumer, Chemical, Pharmaceutical and Fertilizer may be the beneficiaries of the budgetary

measures.

Market to trade in the range of 8.5-9.0x – 50,000pts target maintainedWe maintain our KSE‐100 index target of 50,000 pts by Dec 2018, which we had earlier forecasted (please refer

to our strategy report titled, ‘Pakistan Market Outlook’ dated Dec 20, 2018). Since our report, KSE‐100 index has

rallied 19% (14% in US$).

We believe that the market will likely trade in the PE range of 8.5‐9.0x, as mentioned in our above stated

strategy report. Market is currently trading at 2019F PE of 8.4x, based on our sample companies.


Stock Market Outlook

Top Picks: Key Numbers

PE (x) Dividend Yield PBV (x)PE (x) Dividend Yield PBV (x)

2018E 2019F 2020F 2018E 2019F 2020F 2018E 2019F 2020F

Market 9.6 8.4 7.8 5% 6% 6% 1.5 1.4 1.2

Market (ex‐Oil) 9.3 8.1 7.5 5% 6% 6% 1.4 1.3 1.2

OGDC 8.8 7.9 7.2 4% 5% 5% 1.3 1.1 1.0

ENGRO 14 3 13 1 9 6 8% 8% 8% 2 6 2 7 2 8ENGRO 14.3 13.1 9.6 8% 8% 8% 2.6 2.7 2.8

BAHL 8.7 7.2 6.1 5% 5% 7% 1.6 1.5 1.3

ISL 12.0 6.8 5.8 3% 6% 7% 4.5 3.2 2.4

LUCK 13.7 12.8 12.5 2% 2% 2% 2.0 1.8 1.7

AICL 7.6 6.8 6.2 7% 7% 8% 1.0 0.9 0.8


Source: Topline Research

FY19 Budget – Populous Budget ahead of elections

h f k h h l d l f l f h h fThe recent Tax Reforms Package where the salaried class was given significant relief has set the tone ofexpectations of further tax relief in upcoming budget. Besides tax relief, economic growth, improvement ininvestment climate, populous measure are likely to remain key areas of focus for the Govt. in Federal BudgetFY19 as this will be the last budget before General Elections scheduled in Jul/Aug 2018FY19 as this will be the last budget before General Elections, scheduled in Jul/Aug 2018.We believe that tax relief measures could potentially be reversed or reduced after Election to contain budgetdeficit. This is because there are strong expectations that given high CAD and declining reserves, Pakistan islikely to enter an International Monetary Fund (IMF) program in 2H2018, which is usually followed by shrinkagelikely to enter an International Monetary Fund (IMF) program in 2H2018, which is usually followed by shrinkagein fiscal balance. Please see our report titled “Pakistan Economy – Life with IMF and its Impact” dated April3, 2018.Total budget outlay for FY19 is estimated at Rs5.5tn (8% higher than the last year’s budget outlay ofRs5.1tn), which seems optimistic in light of the current macroeconomic situation.The Govt. is proposing Federal Public Sector Development Program (PSDP) of Rs750bn for FY19, as compared torevised PSDP for FY18 of Rs800bn (as against initial target of Rs1tn). The Govt. is likely to set Rs1.7tn ofconsolidated PSDP for FY19 versus Rs2tn set for FY18. Given fiscal slippages, the Govt. may rein in the PSDP, webelieve.Total revenue receipts for FY19 is anticipated at Rs4.5tn, which will be higher than Rs4tn expected for FY18. Web li th t th t ill t ti ll t l t hi thi t t d lik l i t i id i th


believe that the govt. will potentially struggle to achieve this target and likely increase tax incidence in monthsto come to achieve this target.



The govt. is targeting budget deficit of 4.9% for FY19 as compared to 5.5% expected for the current fiscal year.

This is close to our estimate of 5% and will likely be achieved by announcement of further tax measures post

budget and containment of expenses.

Other than tax measures, further currency devaluation and increase in interest rates are expected to slow down

GDP growth to less than 5% during the next few years as against the govt. target of 6.2% for FY19 compared to

5 79% (11 Year high) We expect next year’s GDP growth to be at 4 6%5.79% (11‐Year high). We expect next year s GDP growth to be at 4.6%.

Inflation has been targeted at 6% for next fiscal year compared to our estimate of 7% due to further

devaluation. For FY18, inflation is expected to be around 4.25%. Current Account Deficit (CAD) is projected at

US$12.5bn, which is in‐line with our estimates.

Key Budget StatisticsRsbn FY15A FY16A FY17A FY18E FY19BE*

Revenue receipts 2,910 3,420 3,647 4,000 4,500

Total Expenditure 4,235 4,479 4,361 5,103 5,500

Federal PSDP 542 661 733 800 750

Fi l D fi i 5 30% 4 60% 5 80% 5 50% 4 90%

17Pakistan Budget Preview

Fiscal Deficit 5.30% 4.60% 5.80% 5.50% 4.90%

Source: Topline Research, *Budgetary Estimates

E d


Expected tax measuresGovt. is expected to continue penalizing non‐filers in upcoming budget. The government can increase the rates

of withholding taxes (WHTs) for non‐filers including banking transactions, cash withdrawal, purchase of motor

vehicles, brokerage and commission etc.

The govt. is adamant on bringing valuations close to market values in the real estate sector. To this effect, the

govt. announced the following measures as part of the Tax Reform Package: 1) Only filers to be able to transact

real estate properties having declared value in excess of Rs4mn; 2) buyer/seller allowed to declare any value

with the caveat that the govt. will have the option to buy the property at two times the declared value and 3)

federal and provincial taxes proposed to be reduced to 1% (total of 2%) each compared to total 5.5% now.

Above real estate measures are expected to be part of Finance Bill and will likely help bring in unaccounted for

wealth in the real estate sector. Even though tax rates have been proposed to be reduced, transactions at higher

declared values will likely yield higher tax revenues for the federal and provincial governments.

Since the announced tax amnesty scheme aims to broaden the tax base, it will likely help the Govt. to generate

tax revenues, we believe.

If successful, the Govt. can potentially earn around Rs300bn (1.0% of GDP) assuming up to US$70bn (foreign

assets US$25bn, local assets US$45bn) is declared under the amnesty scheme. In a similar scheme on local

assets in the year 2000, the Govt. earned Rs10bn in tax revenue.


E t d li f


Expected relief measuresThe Tax Reform Package announced by PML‐N govt. in Apr 2018 included significant relief for the salaried class, whichwill likely be included in the budget proposal. The govt. has proposed maximum tax rate of 15% for annual income inexcess of Rs4.8mn. Previously, maximum tax rate was up to 30%. However, this measure is expected to have negativey, p , p gimpact on revenues of Rs90‐100bn (~2% of total revenue).

Tax relief on salaried classRsRs

Monthly Income 150,000 300,000 500,000 Annual Income 1,800,000 3,600,000 6,000,000 Tax as per currently applicatble rates 137,000 497,000 1,147,000 Tax as per revised rates 30,000 180,000 360,000

Govt. plans to continue incentivizing farmers and Agriculture Sector in the upcoming budget, before Election. It isdl b i id d b li h d G f l S h (G ) hi h i d

p , , ,Savings 78% 64% 69%Source: Topline Research

reportedly being considered to abolish or reduce Gas Infrastructure Development Surcharge (GIDC), which is expectedto result in lower price of fertilizer to farmers.Govt. is reportedly going to set subsidy target of Rs219bn for FY19 as against Rs139bn budgeted for FY18. Subsidy forpower sector is likely to be maintained at Rs119bn (Rs118bn in FY18) while Pakistan Railways is expected to get


p y ( ) y p gRs30bn, which was not the case last year. The balance amount has been reportedly earmarked for trade relatedincentives, crop procurement (PASSCO and TCP), Pakistan Steel Mills and State Engineering Corporation.



Since, this would be the last budget before general elections (July/Aug 2018), we expect the government to take

some populist measures in upcoming budget. These measures could include but not limited to 1) relief for

domestic consumers in the form of power subsidies, 2) incentive package for farmers, 3) development of low

cost housing schemes, 4) affordable health care program for the masses and 5) higher allocation of funds in

Benazir Income Support Program (social welfare program), 6) increase in pensions and salaries of Govt.

employees.

Subsidy as % of GDP

2.5%

3.0%

1.0%

1.5%

2.0%

0.0%

0.5%

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

EHonda Atlas Cars (HCAR) 20Pakistan Budget Preview

Source: Pakistan Economic Survey/Govt. Estimates

Budget At a Glance

Federal Budget At a GlanceRsbn FY13A FY14A FY15A FY16A FY17A FY18BE*Net Revenue Receipts 1,616 2,184 2,378 2,481 2,583 2,926Tax Revenue 2,125 2,514 2,910 3,420 3,647 4,330Non Tax Revenue 712 1,083 1,042 913 901 980FBR Revenue 1,936 2,475 2,605 3,104 3,361 4,013Gross Federal Receipts 2,837 3,597 3,952 4,333 4,549 5,310Less: Provincial Share 1,221 1,413 1,575 1,852 1,965 2,384Total Expenditure 3,478 4,057 4,235 4,479 4,361 5,103Current 2,907 3,199 3,481 3,282 3,494 3,763Current 2,907 3,199 3,481 3,282 3,494 3,763Interest Payments 991 1,148 1,270 1,315 1,348 1,363Defense 570 630 720 776 888 920Federal Development Exp. & Net Lending 571 859 754 879 867 1,340Federal PSDP 388 425 542 661 733 1,001Provincial Surplus 47 183 142 337 290 347Provincial Surplus 47 183 142 337 290 347Overall Fiscal Deficit** 1,834 1,389 1,457 1,349 1,864 1,479As percent of GDPTax Revenue 9.3% 9.9% 10.6% 11.6% 11.4% 12.6%Non Tax Revenue 3.1% 4.3% 3.8% 3.1% 2.8% 2.8%FBR Revenue 8.5% 9.7% 9.5% 10.5% 10.5% 11.7%Total Expenditure 15.2% 16.0% 15.5% 15.1% 13.7% 14.8%Current which includes 12.7% 12.8% 12.7% 11.1% 10.9% 10.1%Debt Servicing 4.3% 4.5% 4.6% 4.4% 4.2% 4.0%Defense 2.5% 2.5% 2.6% 2.6% 2.8% 2.7%


Development 2.5% 3.4% 2.8% 3.0% 2.7% 3.9%Fiscal Deficit 8.0% 5.5% 5.3% 4.6% 5.8% 4.3%Source: Topline Research; * Budgetary Estimates, ** Adjusted for Foreign Loans Repayments


Pakistan Key Macro Indicators

FY17A FY18E FY19F FY20F FY21F FY22F FY23F

GDP Growth (%) 5.3% 5.7% 4.6% 4.7% 5.1% 5.1% 5.1%

GDP/Capita (US$) 1,629 1,630 1,670 1,723 1,784 1,847 1,913

PKR/USD – June‐end 105 115 127 136 140 144 148

SBP Policy Rate (%) – June‐end 5.75% 6.50% 8.25% 8.75% 8.75% 8.00% 7.50%

Inflation (%) 4.2% 4.0% 7.0% 7.5% 7.5% 7.0% 7.0%

( S$b ) S 8 3 2 0 9 8 0 2 0 3 3Imports (US$bn) – as per SBP 48.5 53.1 52.0 49.8 50.7 52.0 53.3

Exports (US$bn) – as per SBP 21.9 23.7 24.9 26.6 28.0 29.4 30.8

Trade deficit (US$bn) – as per SBP 26.6 29.4 27.1 23.2 22.7 22.6 22.5

Current Account Deficit (US$bn) 12 4 15 6 12 2 8 1 7 6 7 2 7 2Current Account Deficit (US$bn) 12.4 15.6 12.2 8.1 7.6 7.2 7.2

Current Account Deficit (% GDP) 4.1% 5.1% 3.8% 2.4% 2.1% 1.9% 1.8%

Foreign Direct Investment (US$bn) 2.3 3.3 3.9 4.0 4.0 4.0 4.0

Net Ext. Fin. (excludes debt repayments) (US$bn) 8.4 5.4 5.4 4.1 5.3 6.5 7.2Net Ext. Fin. (excludes debt repayments) (US$bn) 8.4 5.4 5.4 4.1 5.3 6.5 7.2

Foreign Exchange Reserves (US$bn) – June‐end 16.1 9.1 13.1 15.1 16.1 16.1 16.1

Total Public Debt as % GDP 68% 71% 72% 73% 72% 72% 72%

Fiscal Deficit as % GDP 5.8% 5.8% 5.0% 4.7% 4.7% 4.4% 4.4%


Source: State Bank of Pakistan; International Monetary Fund; Topline Research

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