The market’s rally post the budget reflects a realistic and progressive F2011 budget. The government is achieving fiscal consolidation program which is positive for earnings growth and market performance. The key risk factors in what seems to be a very strong growth environment are a combination of rising inflation and fragile risk appetite.
Yield curve flattening is likely more certain – the government’s market net borrowing is estimated to fall 13% in F2011 – this is positive for banks, especially public sector banks. The increase in excise taxes is offset by reduction in personal taxes so consumption will remain strong.
The balance of government spending is shifting from non-plan to plan expenditure with benefits to infrastructure and rural spending. Tax reforms are on track for implementation in F2012. A new company law, the food security bill and possible energy sector reforms are likely in the coming months.
Divestment target of Rs400 billion should be reassuring to the market as a signal for further reform on top of Rs250 billion to be achieved in F2010. Going forward, we expect to see policy action on rates to pre-empt demand side inflation.