June 10, 2021 (MLN): There is no doubt that effective and in time strategic moves taken by the government played a significant role to lift out the economy from the after-effects of lockdown amid Covid-19.
Particularly on the market side, not only developing but also bourses of developed countries showed jittery performance during pandemic while PSX resisted this negative impact on the back of apt intervention of government which safeguarded the interests of investors and kept their sentiments upbeat.
The capital market has enough potential to tackle many of the structural imbalances such as small tax base, low savings rates, non-documentation and low investment rates that pulled the growth of Pakistan's economy over the years.
These issues can only be addressed through certain policies so that Pakistan's capital market could utilize its maximum potential to be a significant source of revenue.
As the government’s focus has tilted towards elevating present economic statistics to achieve the targeted growth of 4.8%, this would ultimately translate into uplifting the sentiment of investors.
To note, the incumbent government is going to announce the budget for the Fiscal Year 2021-2022 on June 11, 2021. The FY21-22 budget which covers the period between July 1, 2021 and June 30, 2022 is likely to expedite the growth momentum that has emerged from FY21.
In the past month, the benchmark KSE-100 index has gained 7.0%, recording the strongest pre-budget rally since FY14, on the back of increased visibility of Govt.
The rally has also gained support from positive number release on the macro front (significant watering down of COVID cases with positivity rate falling into low single digits from double digits pre-Eid holidays, FY21 GDP growth surpassing authorities’ own estimates etc.), concrete actions by Govt to elevate itself from FATF overhang (Pakistan now compliant on 31 accounts out of 40 on FATF APG parameters), and various policy actions (disbursement of the first tranche under agreement with IPPs, stake sell in OGDC and PPL put-off, etc), as per pre-budget report by AKD Securities.
Considering the above-mentioned policy actions, the market is expected to continue with its bull run, where the understanding is based upon previous market trends where pre-budget performance is extended in the near term (13 times out of 17) and current strong corporate earnings, the report added.
According to the pre-budget analysis by Arif Habib Securities, Observing market performance since FY14, positive momentum on average being displayed by the KSE-100 index in anticipation of the budget. 30, 60 and 90 days prior to the announcement of the Federal budget, the domestic equity bourse generated an average return of 3.4%, 7.4% and 6.1%, respectively.
Meanwhile, post-budget data displayed a mixed trend as foreign outflows and uncertainty on the political front suppressed market performance during FY18 and FY19 while investors remained hesitant post FY20 budget due to uncertainty over IMF program conditions. On average, the local bourse garnered less enthusiasm, with returns of -1.0%, 2.4% and 6.5% over 30, 60 and 90 days respectively, subsequent to the budget announcement, the report said.
In order to increase the investor base and depth of the capital market by incentivizing new listings, and sustain market momentum, Farrukh H Khan, MD PSX presented relevant budget proposals for the due consideration of the Finance Ministry.
While appreciating the proposals/recommendations, the Federal Minister for Finance & Revenue Shaukat Tarin said, “Present government is ready to adopt measures to develop capital markets.”
Talking to Mettis Global, Saad Hashmi Economy Expert at Topline Securities said, “The market is likely to remain positive after the Budget announcement mainly due to the investor-friendly and pro-growth-oriented approach. It is expected that major sectors will be given incentives that ultimately boost the sentiments of investors.”
Explaining his view further he mentioned that it may be possible that no new taxes will be imposed in order to achieve the GDP growth target of 4.8% for the next fiscal year.
Speaking to Mettis Global, Arsalan Siddique, Analyst at Foundation Securities stated, “Post-budget market outlook seems positive in a way that important industries such as cement and steel are expected to have benefits/incentives which will certainly decline the input prices.”
Moreover, the allocated amount (40% higher than FY21) in PSDP will also extend an optimistic atmosphere in the market, he added.
The overall effect will penetrate throughout the market and upsurge the investor’s confidence.
Responding to a question about his expectation, he said “if we see the strategies of government with respect to the capital market in last 1-2 years- which were quite supportive, hence we can expect some leverages/incentives in the upcoming budget too.”
However, it seems unrealistic that government will consider each presented proposal for obvious reasons.
Responding to a query pertaining to PSX proposal related to a reduction in the rate of Capital Gain Tax, carry forward of losses to be allowed for 6 years, and zero withholding tax for individuals on dividend up to Rs600,000/annum, he said that it is very early to comment on it. However, if the government considers these proposals as they are then it would be a positive trigger to the capital market.
In response to a question regarding SMEs, he stated, “Since the government is putting its maximum efforts to uplift the industrial sector at present, particularly the manufacturing side, that will make its way to the SMEs and hence this segment of the economy may also get some ease.”
He also pointed out the deadlock between IMF and the government. He was of the view that government will surely adjust certain conditions of IMF under this budget to some extent.
“Any form of reduction in taxes will ultimately beneficial for the businesses but at this point, it is very early to comprehend the exact scenario whether the government considers the presented proposals or it has to go with the present set of taxation,” he said.
It is pertinent to mention that the revenue target of the government is on the high side and the target of petroleum levy is around Rs600bn. Keeping this in mind, there is a possibility that petroleum prices may see a substantial rise subject to comply with the conditions of IMF which would take the economy under inflationary pressure.
Subsidies to the power sector are a crucial part of the budget with respect to the inflationary impact, the interest rate will be determined- the key driver of the market. If inflationary pressure increases in the economy, it will surely dent the investor’s interest.
While talking to Mettis Global, Muzammil Aslam- an Independent Economist said, “Coming budget is likely to be business-friendly along with the possible incentives to the main sectors.”
He was of the view that fifty percent chances for the consideration of PSX proposals exist. He highlighted that a growth-oriented budget will likely boost the profitability of the listed companies which will increase the positive upbeat in the market.
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