Oh budget, ah budget!

This trading week, which started on May 27, has seen lots of vol­atility around budget specu­lations. Downward movement of the index had paused at 1,291 and since then it had shown erratic movements guided by optimism (upswings) followed by pessimism (downswings). This cycle contin­ued even after the budget for fiscal year 2018/2019 was unveiled on May 29. Investors/traders are analyz­ing what changes can be expected in the market fundamentals after budget comes into effect on July 17. The budget came up with many positive features to directly impact the prevailing fundamentals. All in all, positive features outweighed negative ones.The budget finally ended confu­sions surrounding the provision of VAT levied on broker commission. The budget touched on capacity building of regulatory bodies and amending Nepal Rastra Bank Act, the Insurance Act and the Securities Act in line with the changing times. It also addressed the need for regu­latory mechanisms in the hydro and other sectors. In the BFI sector, it came up with an ambitious plan to encourage every citizen to open a bank account. It also increased the deposit insurance coverage of small­holder depositors, to Rs 300,000, in order to safeguard their hard-earned money and build confidence in for­mal channels. If this happens, we should see additional liquidity in the banking channels.

The budget has announced health insurance of Rs 100,000 for senior citizens over 70. It also expanded health insurance coverage for the general public in all 77 districts. Cur­rently, this provision is being imple­mented in 25 districts only. The budget plans to bear 75 percent of insurance premium on agriculture, livestock and fishery. Health insur­ance coverage of the civil servants will also be raised. All these provi­sions are positive for the insurance sector, both life and non-life. With one policy decision, the government has expanded the market size of the insurance sector. One will see the results in terms of growth in net profit and EPS in the coming years.

The budget has made it compul­sory for the companies with one billion or more of paid-up capital to go public. Moreover, it encourages companies that have Rs 500 million of paid-up capital to go public by providing them tax breaks. Like­wise, private equity, venture funds and hedge funds have been allowed into the equity market. It has plans to get Nepal sovereign credit rating to facilitate easier access to foreign investment and credit. This again will help industries as well as ease up the liquidity situation.

Raising the ceiling on capital gain tax for individuals is the negative aspect of the budget. Of course, one can always argue that the budget has raised the CGT simply by 2.5 percentage points, from 5 percent to 7.5 percent. But if one calculates the percent increment, it comes to 50 percent. This might encourage the traders to trade less often as they need more margin to ensure that they are still making money.

The positive provisions stated above are related mostly to cre­ation of newer supplies in the equity market. But the budget is silent on how the excess supply, already available due to capital increment of the BFIs and insurance sector, is going to get absorbed. Today’s reality is that people from only a handful of districts are linked to the Nepali equity market. So long as this situ­ation is not addressed, we will con­tinue to see the supply overshadow the demand.