omc: no mention; hence safe - BMA Capital Management

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8% 7% 6% 5% 4% 3% 2% 1% 0% 12 Taxing consumption: Indirect taxes the key June 7, 2010 Total revenues for the consolidated fiscal operations are expected to grow by 19% to PKR2.4trn. This growth is primarily led by enhanced tax revenue target for FBR up to PKR1.67trn (21% YoY growth). As the government has increased the 100bps rate for Sales tax along with number of relaxations for direct taxes, the revenue generation is more tilted towards indirect taxes. Considering the number of relief measures under direct taxes, tax revenue target for FY11 seems challenging. Thus imposition of VAT from Oct10 would remain a key determinant to achieve the revenue targets in this regard. Expense Rationalization: Seems optimistic Government has announced to freeze the non development expenditures (excl. salaries); although appealing considering the fiscal consolidation, the materialization of these steps is of prime importance. The overall current expenditure is projected to increase by 9% over last year budget to PKR3trn. The unavoidable part of the budget including defence (+29% YoY to PKR442bn) and debt servicing (+8% YoY to PKR699bn) are to consume as high as 47% of the current expenditures. On the other hand, development expenditure which remained the key element in terms of investment and capacity building is projected to increase by 3% YoY. As it remained the key accused of fiscal constraints, higher allocation of funds for PSDP to provinces would remain a key element in materializing the projected outlays. During FY10, actual disbursement of PSDP remained under PKR300bn compared to original allocation of PKR646bn. Higher share of provinces in revenues (57.9% YoY) and allocation of development funds are the prominent features of budget FY11. Tax to GDP Provinces to enjoy more autonomy Direct Tax to GDP In direct Tax to GDP FBR tax to GDP FY07A FY08A FY09A FY10BE FY11BE Source: MoF, BMA Research Source: MoF, BMA Research 12% 10% 8% 6% 4% 2% 0% 60% 50% 40% 30% 20% 10% Provincial share in total revenue Provincial share in PSDP 0% FY08A FY09A FY10BE FY11BE Subsidy elimination: The other half of the story Fiscal constraints have left no option but to confine welfare through price pass on. The government has thus eliminated a number of subsidies through budget FY11; during FY10, govt. had allocated subsidies of PKR228.9bn (1.5% of GDP) against initial estimates of PKR119bn (0.9% of GDP). Due to the set plan of eliminating subsidies on electricity tariffs, the government projects total subsidies of PKR127bn for FY11 which accounts for 0.7% of GDP and lower by 45% YoY compared to revised budget FY10. Although the electricity related subsidies are projected to decline by PKR92bn in FY10, it is worth mentioning that no concrete plan to address the lingering circular debt issue has been
13 June 7, 2010 announced in the budget. The circular debt not only caused partial outlays from PSDP but also caused 2% decline in GDP growth for FY10. Subsidies: Comparative Analysis Classifacation Budget 2009-10 Revised 2009-10 Budget 2010-11 YoY PKR mn WAPDA 62,903 147,005 84,000 -43% KESC 3,800 32,521 3,317 -90% TCP 30,000 30,000 17,130 -43% USC 4,200 4,200 4,200 0% Others 19,012 15,266 18,036 18% Source: MoF, BMA Research Current Subsidies 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% FY01 FY02 FY03 Source: FBS, MoF, BMA Research Deficit financing: Defies monetary easing 119,915 228,992 126,683 -45% FY04 FY05 FY06 Contrary to last year, government has set rational targets for external financing at PKR186bn (-41% YoY). During the current fiscal year, financial soundness indicators i.e. CDS spread and Euro bond yield for Pakistan declined significantly from their peak levels of 50% and 25% respectively to under 8%. This development should help government to achieve the target of ~USD500mn Euro bond issue during FY11. Moreover, it would also help reduce dependence on uncertain resources i.e. FoDP and other multilateral funds. On the other hand, rest of the financing requirement for PKR499bn is expected to be routed through domestic resources wherein banking and non-banking channels are to contribute PKR167bn and PKR333bn respectively. Considering the prevailing liquidity issues of the banking system, higher targets for deficit financing should keep private sector credit in check. Moreover, uncertainty over projected grants (35% of external financing) would also remain a concern. In case of non materialization of these inflows, borrowing pressure on domestic resources is imminent. Persistent borrowing from banking channel kept monetary aggregates under check and abandoned the private sector credit. Continuation of deficit financing through banks in FY11 suggests no major change on monetary side. FY07 FY08 FY09 FY10 FY10P FY11F
Page 1 and 2: 65 Federal Budget 2010-11 Cautious
Page 3 and 4: 3 TABLE OF CONTENTS Budget FY11: No
Page 5 and 6: 5 June 7, 2010 package will have li
Page 7 and 8: 7 June 7, 2010 against an average o
Page 9 and 10: 9 Sector wise Budget Impact and BMA
Page 11: ECONOMY Budget Impact Positive Abdu
Page 15 and 16: 15 KEY MEASURES Income tax June 7,
Page 17 and 18: E&P MARKETWEIGHT Budget Impact Neut
Page 19 and 20: OMC OVERWEIGHT Budget Impact Neutra
Page 21 and 22: 21 June 7, 2010 Moreover, seemingly
Page 23 and 24: CEMENTS OVERWEIGHT Budget Impact Ne
Page 25 and 26: CHEMICALS MARKETWEIGHT Budget Impac
Page 27 and 28: 27 Outlook FY11E June 7, 2010 Incre
Page 29 and 30: 29 Top Investment Ideas June 7, 201
Page 31 and 32: BUY Fair Value: PKR 282 Current Pri

omc: no mention; hence safe - BMA Capital Management

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