National Saving Scheme (NSS) rates hike would increase the opportunity cost of investment in the stock market, especially in the high dividend yield stocks, analysts said. The Central Directorate of NSS has increased profit rates on NSS for the second time in two months as government attempts to move away from inflationary borrowings through central bank to non-inflationary instruments such as NSS.
The yields have been increased in a range of 170-240 bps on major NSS products excluding once famous 10-year DSC (Defence Saving Certificates), whose rates would be revised at a later date. "This was all the more imperative, given the fact that the government has set itself an ambitious target of Rs 150 billion net deposits from NSS in FY09, nearly twice the amount of Rs 81 billion received in FY08", Farhan Rizvi, an analyst at JS Global Capital, said.
A vital component of the monetary tightening regime and the IMF agreement have been government's commitment to stop borrowing from the central bank which is highly inflationary. The government has already borrowed Rs 376 billion in FY09 as of November 15, 2008 in order to meet its budgetary requirement after running high budget deficits on accounts of subsidies.
"We believe, the 170-240 bps increase in profit rates of NSS schemes would help government attract additional deposits and reduce its reliance on SBP borrowings to finance budgetary deficits going forward", Farhan said, and added "This is even more significant given the Rs 150 billion target set for FY09 and a dismal performance in the first quarter FY09, when net NSS collection drop by 7 percent to Rs 21 billion".
This is especially more relevant as stock markets globally have witnessed huge falls, forcing investors to look for safer havens. The local stock market scenario is no different, even though the price freeze has restricted the fall in index since August 27, 2008, 25 to 30 percent discount in the off-market reflects the risk attached to equity investment at present, he said.
He said that increase in NSS rates would make the saving schemes more attractive for individuals and those institutions that are allowed to invest in NSS. Thus, this would put some degree of pressure on bank sector deposits which have already seen a difficult time recently, falling by 4 percent in last 5 months.
Though banks are already offering attractive return of around 12-15 percent on various schemes, there would be pressure to increase returns further, especially as NSS schemes would see crowding out already limited liquidity in the local economy. "We have already assumed 4 percent and 6 percent deposit growth in 2008 and 2009, respectively, compared with a CAGR of 18 percent in the last 5 years (2003-07)."
In addition to increase in NSS rates, the other major economic news at the weekend was the official release of fiscal deficit figures for the first quarter of FY09, according to which fiscal deficit eased considerably to Rs 139 billion (1 percent of GDP) as against fiscal deficit of Rs 158 billion (1.6 percent of GDP) in 1QFY08.
While these numbers look encouraging, they are a bit misleading as the reduction in fiscal deficit was mainly led by a 69 percent cut in development expenditure to Rs 39 billion in the first quarter of FY09 as against expenditure of Rs 128 billion recorded in the first quarter of FY08.
Despite cut in development expenditure, fiscal numbers for the first quarter of FY09 showed some encouraging signs as tax revenues rose by 28 percent on year-on-year basis, while current expenditure also declined by 45 percent from fourth quarter (April-June) FY09 as the government strategy to increase domestic oil product prices and electricity tariffs helped to reduce subsidies and ultimately reduce fiscal deficit from 2.4 percent in the fourth quarter of FY09.
Given the fact, that government is collecting Rs 9 billion monthly in Petroleum Development Levy on oil products, it would boost future revenues, while reducing subsidy pressures on current expenditure, going forward. IMF has set a fiscal deficit target of 4.2 percent of GDP for FY09 and 3.3 percent for FY10 and the government seems to focus on reducing development expenditure as a means of achieving this target, Farhan added.