Fri, 20th January 2017

Anirudh Sethi Report


Archives of “public finance” Tag

World Bank latest reports says global growth to accelerate slightly

World Bank’s latest Global Economic Prospects report … headlines:

  • Forecasts global real GDP growth at 2.7% in 2017 vs 2.3% in 2016
  • Forecasts advanced economies’ growth at 1.8% in 2017 (vs 1.6% in 2016)
  • Emerging/developing economies’ growth at 4.2% in 2017 (3.4% in 2016)
  • Forecasts US growth at 2.2% in 2017 (vs 1.6% in 2016) … they say their forecast excludes effects of any policy proposals from trump administration


  • Challenges for emerging market commodity exporters are receding, while domestic demand solid in emerging market commodity importers
  • Fiscal stimulus in US could generate faster domestic and global growth, but extended uncertainty over policy could keep global investment growth slow
  • Forecasts China’s growth slowing to 6.5% in 2017 (from 6.7% in 2016)
(Headlines via Reuters)
The World Bank looking at the recovering oil and commodity prices, noting this eases the pressures on emerging-market commodity exporters. Expects the recessions in Brazil and Russia to end.
As always the Bank notes uncertainties in its forecasts (all forecasters should), with upside uncertainty (in the short term at least) on US potential increased fiscal stimulus, tax cuts, infrastructure spending.  Looking further out, though, a surge in debt load, higher interest rates & tighter financial conditions would have adverse effects.
Also downside potential on a more protectionist trade stance.

How to Become a Trillionaire and Other Thoughts

Grab one of these:


Careful what you wish for central bankers and fiscal policy makers.  Though we don’t see signs of “rollover risk” in any of the G5 or G20, it’s all about confidence and you know what Joe said about confidence:

Confidence is a very fragile thing.  – Joe Montana

.The World Economic Forum reports this about Zimbabwe’s ghost of hyperinflation past,

Zimbabwe was once so gripped by hyperinflation that the central bank could no longer afford paper on which to print practically worthless trillion-dollar notes. 

The government reported in July 2008 that Zimbabwe was experiencing inflation of 231 million percent (231,000,000%). However, the Libertarian think tank, the Cato Institute, believes that the real inflation rate was 89.7 sextillion percent or 89,700,000,000,000,000,000,000%.

It is interesting to note that the country is now grappling with the opposite problem.

Like Britain, Japan, the US and other nations dealing with the consequences of weak demand and cheap oil, Zimbabwe is threatened more by the prospect of falling prices. But that doesn’t mean its people are ready to trust that hyperinflation won’t happen again.

Saudis Forecast $51 Oil In 2017 Rising To $65 By 2019; Will Spend 20% Of Total Budget On Military

After suffering two record budgets shortfalls in 2015 and 2016 as a result of plunging oil prices, and which nearly brought both Saudi Arabia’s economy and banking sector to a standstill, not to mention billions in unpaid state worker wages at least until generous foreign investors funded the Kingdom’s imminent cash needs with its first, and massive, bond sale ever, today Saudi Arabia released it budget outlook for the next year.

And while the Saudis believe the country’s budget deficit will fall modestly next year even with an increase in spending, it is still set to be a painful 8% of GDP suggesting the Saudi cash burn will continue even with some generous oil price assumptions.

The budget deficit for 2017 is expected decline 33% to 198 billion riyals ($237 billion), or 7.7% of GDP, from 297 billion riyals or 11.5% of GDP in 2016 year and 362 billion riyals in 2015, the Finance Ministry said in a statement on its website on Thursday. In 2016, the finance ministry said its spending of 825 billion riyals ($220 billion) was under the budgeted 840 billion, and the 2016 budget deficit came to 297 billion, below the 362 billion in 2015.


Goldman Raises S&P Target To 2,400 On “Trump Hope”

Having warned for nearly all of 2016 that the market is getting ahead of itself on the back of median P/E multiples that are higher than 99% of all historical reading, Goldman chief strategist David Kostin stubbornly kept his year end S&P target at 2,100 on valuation concerns.

Today, however, with oil soaring and the S&P at all time highs, he finally threw in the towel as a result of the Trump victory, and in a report Kostin writes that the Trump “Hope” will dominate through 1Q 2017 as S&P 500 climbs by 9% to 2400.  However, at that point, “less-than-expected tax cuts and higher inflation and interest rates will limit both upward EPS revisions and any P/E multiple expansion. S&P 500 will end next year at 2300, reflecting a price gain of 5% and a total return of 7% including dividends.”

Here is the summary from Goldman:

  • US equity investors have focused “more on hope than n fear” since Donald Trump’s election. Ironically, many commentators believe his campaign rhetoric focused “more on fear than hope.” In 2017, we expect the stock market will be animated by competing views of whether economic policies and actions of President Trump and a Republican Congress instill hope or fear.
  • “Hope” will dominate through 1Q 2017 as S&P 500 climbs by 9% to 2400. The inauguration occurs on January 20 and our Washington economist expects much legislation will be proposed during the first 100 days. The prospect of lower corporate taxes, repatriation of overseas cash, reduced regulations, and fiscal stimulus has already led investors to expect positive EPS revisions. Instead of our baseline adjusted EPS growth of 5% to $123, growth could accelerate to 11% and reach $130, which would support a P/E multiple above 18x. Top “Hope” investment recommendations: (1) Cyclicals vs. Defensives; (2) Stocks with high US versus foreign sales exposure; and (3) High tax rate companies.
  • “Fear” is likely to pervade during 2H and S&P 500 will end 2017 at 2300, roughly 5% above the current level. Our economists expect inflation will reach the Fed’s 2% target, labor costs will be accelerating at an even faster pace, and policy rates will be 100 bp higher than today. Rising inflation and bond yields typically lead to a falling P/E multiple. Congressional deficit hawks may constrain Mr. Trump’s tax reform plans and the EPS boost investors expect may not materialize. Potential tariffs and uncertainty around other policy positions may raise the equity risk premium and lead to lower stock valuations in 2H. The median stock trades at the 98th percentile of historical valuation based on an array of metrics. Top “Fear” investment recommendations: (1) Low vs. High labor cost companies; and (2) Strong vs. Weak Balance Sheet stocks.
  • Money flow represents a potential upside to our baseline forecast. Equity mutual fund and ETF inflows may benefit as investors lose money owning bonds. After years of active management underperformance and outflows, higher return dispersion will increase the alpha opportunity for investors skilled enough to capture it. Economic policy uncertainty and the later stages of the economic cycle are typically associated with higher stock return dispersion

Why Deutsche Bank Thinks The S&P Is Going To 2,500 Next

For the past year, Deutsche Bank was one of the most stubbornly pessimistic banks. Then, overnight, everything changed for one reason: Donald Trump.

The German bank laid out its 180-degree change in opinion in a 30-page Friday note titled “Trump: the huge picture for stocks”, in which it revealed that it now expects the S&P to easily rise to 2,250 by Trump’s inauguration, and then rise to 2,500 by 2018 “before suffering its next bear market.” 

While not necessarily the “huge picture”, here is the big picture summary of DB’s note: 

In the first week of President elect Trump, most of our investor conversations centered on their concerns about a higher fiscal deficit lifting Treasury yields and pressuring PEs and a stronger dollar/ weak oil prices pressuring the EPS outlook and the possibility of protectionism. While we don’t ignore such risks, we think the market is under appreciating the likely big boost to S&P EPS from a lower corporate tax rate and the boost to Bank profits from rising yields (and lower pension expense) and the much higher chance now of a long lasting economic expansion that rivals the 10 year US record. We’re more confident now that the S&P will reach 2500 in 2018 before suffering its next bear market.

Goldman Sachs Top Ten Market Themes for 2017

Chief Credit Strategist Charles Himmelberg says 2017 will be “High growth, higher risk, slightly higher returns”

  1. Slightly higher returns relative to 2016. “Best improvement in the opportunity in global equities is in Asia ex-Japan.”
  2. Fiscal stimulus in the U.S. will help reflate the economy
  3. No imminent trade war on the horizon, any re-negotiation of agreements currently in place (like NAFTA) to focus on attempts to improve the prospects for the U.S. manufacturing
  4. The Emerging Markets risk ‘Trump tantrum’ is temporary
  5. Forecasts ($/CNY at 7.30 in 12 months) a depreciation for yuan well beyond forward market pricing
  6. Monetary policy will increasingly focus on credit creation
  7. 2017 will confirm that the U.S. corporate sector has emerged from its recent ‘revenue recession’
  8. Forecasting large boosts to public spending in Japan, China, the U.S., and Europe, which should fuel inflationary pressures in those economies
  9. Commodity-sensitive segments of the credit market have suffered pain in 2016, there hasn’t been much in the way of contagion… expect more of the same in 2017, with the credit cycle not making a turn for the worse
  10. Conditional on a large fiscal stimulus in 2017, the FOMC will be obliged to respond more aggressively to an easing of financial conditions, all else equal … cautions that it’s no sure bet that financial conditions will ease in the year ahead, noting the recent rise in bond yields and the U.S. dollar

Power groups find fault with GST

Both India Inc and financial bureaucrats have quietly started opposing many elements of the proposed GST structure.

They fear GST’s multiple rates, complex reporting and tax payment modes may not be what they had bargained for.

They are also realising that the GST council will be forever free to change slabs, add cesses and include or exclude items from slabs at their will, putting long-term business plans in disarray.

“GST was initially conceived as a two-slab tax regime capped at 12 per cent. It was supposed to bring down taxes, make goods and services cheaper for the consumer, give a fillip to demand and push up economic growth by around 2 per cent. The slabs were later rethought and stretched to a three-slab regime capped at 16 per cent. Now, we are staring at a 5-6 slab regime whose cap may be at 40 per cent,” a top North Block economist said.

It is feared that GST may not be able to spur the gross domestic product the way it was supposed to as the new rate structure more or less corresponds to the current total tax on a commodity. Hence, the bureaucracy feels GST may not be as successful as VAT (value-added tax) in the absence of any major economic benefit and the added burden of a complex tax structure with its paperwork.

GST tax rates declared; here’s how your household budget will be impacted

GST tax structure: As details emerge of the 4-tier tax structure under GST, it is yet unclear what items in your household budget are likely to cost more, and which will be cheaper. The GST Council has decided on four main tax rates, 5%, 12%, 18% and 28%. The highest tax rate is more than what the industry was anticipating. Dabur CEO Sunil Duggal told CNBC TV-18 that the 28% tax rate is a surprise. “We expected a rate of 25-26%. It is unclear whether this rate is applicable on food & ayurvedic products. We need more clarity on items in each slab,” he said.

According to Finance Minister Arun Jaitley, items that are used by the aam aadmi, that is which qualify for mass consumption, will be taxed at 5%. Around 50% of the items that form part of the consumer price index basket (such as daily food consumption items) will not be taxed at all under GST. The tax rate of gold is yet to be decided, the Finance Minister said. Jaitley has also said that several items will be transferred to the 18% GST rate category from 28%.

The highest tax slab will be applicable to items which are currently taxed at 30-31% (excise duty + VAT). Luxury cars, tobacco and aerated drinks would also be levied with an additional cess on top of the highest tax rate. Jaitley has said that the additional revenue from the highest tax slab will be used to keep essential use items at 5% and to help transfer common items to 18%

S&P ups outlook on France’s AA rating

Here’s something to cheer up France’s deeply unpopular president François Hollande.

S&P Global Ratings has upped its outlook on the country’s AA rating from negative to stable, with analysts at the agency citing the government’s recent labour and tax reforms for the move.

The outlook revision reflects the authorities’ gradual introduction of reforms to the tax system and the labor code, and the stabilizing effects these are expected to have on employment, growth, and competitiveness, as well as public finances. The rating has been on a negative outlook for nearly two years. We do not believe that the downside risks we identified then have materialized.

It has been nearly two years since S&P first put Europe’s second largest economy’s credit rating on negative outlook and Friday’s move should a much needed respite to Mr Hollande, whose approval ratings have sank to record lows with less than six months to go before the presidential elections.

GST Council to meet on Tuesday, decide tax rate by Oct 20

The crucial three-day meeting of the all-powerful GSTCouncil, that is slated to begin on October 18, will decide on the tax rate and sort out issues like rolling out compensation for the new tax regime that will come to force from April 1, 2017.

With the finance ministry setting November 22 as the deadline for building a consensus on all issues in the Council, the upcoming meeting is significant as it will decide on its most crucial aspect, which is the tax rate that will have a bearing on the common man.

At its previous meeting last month, the GST Council, which has all state finance ministers as members, had finalised area-based exemptions and how 11 states, mostly in the North-East and hilly regions, will be treated under the new tax regime.

 Tomorrow’s meeting will also deliberate on the Centre’s power to assess 11 lakh service tax filers under the new dispensation.

While a decision to this effect was taken at the first meeting of the GST Council, at least two states dithered on approving the minutes of the meeting, saying that they were not in favour of losing their power of assessment.