Karachi, June 01, 2023 (PPI-OT): May-2023: Budget and politics take center stage

Multiple bear attempts lead to no gains this month

KSE100 Index closed May 2023 at similar levels to previous month, reporting a marginal negative return of -0.6%, taking 11MFY23 returns to -0.5%. While bulls made several attempts, factors such as political noise, budget-related news and prolonging IMF talks kept bringing the bears back, leading to market corrections. Though US$-based returns limited to -1.2% in May, a ~10% gap between kerb and interbank PKR/US$ rates created in the past couple of weeks makes prospective dollar-based returns prone to underperformance in the near future.

Some increase in investor participation, however, was witnessed, with an uptick of 36% MoM in average daily traded value of shares. On the buying side, Individuals and Banking segments emerged as larger net buyers. On the other hand, selling continued from the Foreigners and Insurance segments. Mutual Funds, however, emerged as largest net sellers in May.

Federal Budget and the IMF

Pakistan's import cover still stands at almost 5 weeks, making IMF's approval for the ninth tranche among the highest priorities of the government. As the cash-strapped economy is in dire need of fresh inflows from the Fund and other lenders, we believe FY24 Budget being in line with the ongoing IMF program comes as an important pre-requisite. Recent news flows however emit some positivity where IMF reportedly is looking forward to a board meeting before a financing programme expires at the end of June.

With Federal Budget FY24 scheduled to be announced on 9th June, news reports have been suggesting government eyeing for a more disciplined fiscal account in FY24, as compared to FY23. To recall, 9MFY23's primary balance has so far added up to Rs503bn, falling short of IMF's target set at Rs897bn. On the fiscal side, 9MFY23 deficit came in at Rs3.5trn. Significance being given to Budget preparations is also reflected from the Prime Minister setting up various committees to look into areas of agriculture, revenue measures, information technology, energy, pro-poor expenditures, development budget and industrial growth - which will be directly reporting to the Prime Minister.

Budget news flows suggest higher taxation measures

With ambitious tax collection targets for FY24, much roar on taxing corporate companies' undistributed reserves was among the key highlights of the month as it has so far led to more than 40 listed companies announcing their intention to increase authorized share capital (to most likely capitalize the reserves via large bonus shares announcement). The increase is however subject to shareholder approval in respective Extra-Ordinary General Meetings (EOGMs). If the tax does not materialize it would be interesting to see if the companies still go through with the increase in authorized capital, given material costs that will be incurred in the process. In addition, a handful listed companies have also announced interim bonuses and cash payouts prior to June-end results, which the market is also taking as a hint in relation to the aforementioned tax measure.

With one week left to the Budget announcement, we expect developments regarding the same to dominate market activity this month.