NAIROBI, Kenya, Jun 14 – There weren’t any signs of exuberance or panic from investors, following Thursdays’ budget speech by the Treasury Cabinet Secretary Henry Rotich, going by the marginal dips and gains at the Nairobi Securities Exchange (NSE).
Equity turnover slumped 54.7% to Sh488.55 million, on reduced trading across most large cap stocks on the week ending Friday June 14, 2019. Safaricom Ltd, Equity Bank Group and East African Breweries Ltd were the most traded counters, cumulatively accounting for 72.4% of total market activity. Centum was the leading laggard in the top movers list, down 2.6%, on profit taking by foreign investors.
In it’s weekly overview of trading at the NSE by The Standard Investment Bank (SIB), said benchmark indices ended the week on a disappointing note. The NSE 20 and NSE 25 retreated from their two session rallies, shedding 0.5% and 0.2% respectively while the NASI ashed by a 0.2% margin.
The budget for 2019/20 is estimated at Sh3.1 trillion, with expenditure and net lending expected to cost Sh2.8 trillion. Government is projecting revenue of Sh2.1 trillion, therefore estimating a deficit of Sh607.8 billion to be financed through external and domestic borrowing at a ratio of 53:47.
According to Treasury Cabinet Secretary Henry Rotich, the tax policy measures in the 2019/20 budget are expected to generate an additional Sh37 billion in tax revenue to the Exchequer.
The SIB report highlights some of the tax amendments to fund revenue.
Excise duty on alcohol & cigarettes increased by 15%. “The arbitrary increase is negative to breweries and cigarette manufacturers who will also be hit by an inflationary adjustment on excise duty. The increase will have to be passed to the consumer but EABL and BAT will have to devise tactics to avoid hitting the lower income segment which would lower their volumes,” said report.
There was also a proposal to increase the Capital Gains Tax (CGT) from 5% to 12.5%, with an exemption on transfer of property in corporate restructuring. “CGT is levied on transfer of property situated in Kenya, calculated as a percentage of net gains and paid by the transferer of the property (property includes land, buildings and marketable securities), explained the analysts at SIB, pointing out that the transfer of shares and other securities sold and bought at the NSE are exempt from CGT.
The report noted that Value Added Tax (VAT) was reduced from 6% to 2% to reduce build-up of tax credits and consequently enhance money supply while Withholding Tax was expanded to include security, cleaning, fumigation, catering outside hotels, sales promotion, marketing & advertising services, transportation of goods excluding air transport services.
The budget proposes an amnesty on tax penalties and interest on any outstanding tax for two years prior to the listing for Small and Medium sized Enterprises that list under the Growth Enterprise Market Segment (GEMS) program, in order to encourage those seeking to raise funds from capital markets.
The SIB report also highlights the proposed amendments to the Capital Markets Act to empower CMA to enforce penalties and sanctions on market players who violate laid down rules and procedures.
In his budget speech, CS Rotich stated that there are plans to roll out measures to enhance transparency and predictability in the issuance and trading process for Treasury Bills and Treasury Bonds, but further details are yet to be shared.
As was the scenario in last year’s budget, the CS proposed to reverse section 33B of the Banking Amendment Act 2016, which sets the cap on the maximum chargeable rate of interest rate on bank loans at 4% above the Central Bank Rate – currently pegged on CBR.
“We anticipate a tag of war between the Legislature and the Executive to play out as was the case in the Current Year 2018, in which the former through the Finance Bill 2018, only consented to the scrapping of the minimum rate granted on interest earning deposits – which was set at 70% of the Central Bank Rate,” said the SIB analysis.
The report said that while acknowledging that significant progress has been made in the banking space to accommodate a rate cap removal , the analysts are of the conjecture that the legislature will accommodate a modification of the cap, rather than a total repeal.