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Pledging SUUTI shares: A bit of
fiscal ‘relief’
Bottom line: FY12 Center’s fiscal deficit still 5.8% of GDP
We have cut our FY12 Center’s fiscal deficit forecast by 30bp, to 5.8% of
GDP, after officials told the media that they would fund the budgeted
Rs400bn of PSU divestment by pledging SUUTI shares. That said, we cannot
say that we would recommend this kind of fiscal engineering beyond a crisis
year. In any case, we still expect Delhi to overshoot its budgeted 4.6% of
GDP fiscal deficit target by over Rs1000bn on higher oil subsidies.
Nonetheless, today’s government plan does ease pressure on gilts at the
margin. Given that the government has additionally raised Rs530bn through
dated paper and about Rs250bn through T-Bills, it should not have to borrow
beyond an extra Rs100-200bn, assuming issuance of Rs200bn of Cash
Management Bills. This should get funded by the RBI OMO of Rs400bn that
we expect in January. This, in turn, backs our standing call of the 10y settling
about 8.5% levels. For details, do read our 2012 India Year Ahead here.
Key points: Delhi’s SUUTI proposal to divest PSU stock
Delhi plans to transfer shares and real estate owned by the Specified
Undertaking of the Unit Trust of India (SUUTI) to a newly set up fund
manager by January 15. A government entity, SUUTI was formed in 2003 to
take over the UTI’s US 64 and assured return schemes.
The fund manager will pledge the private sector stocks – such as ITC, Axis
Bank and Larsen & Toubro – it will receive, with banks to raise loans to buy
government stakes in public sector undertakings (PSUs).
This should enable Delhi to raise the Rs400bn it had budgeted from divesting
PSU shares. As of this date, it has collected only Rs11bn from divestment in
the Power Finance Corporation. On our part, we had assumed that the
government would be able to collect only Rs200bn by way of divestment.
With greater visibility of Rs400bn being raised, we have cut our FY12
Center’s fiscal deficit forecast by 30bp, to a still-above-consensus 5.8% of
GDP (Table 1). We forecast the Center’s fiscal deficit at 6.1% in FY13.
As it has not been able to divest PSU stock to investors, the government thus
plans to raise money from banks via loans against shares, rather than issuing
gilts to them. If market conditions improve, the fund manager will sell the PSU
stock to investors and repay the bank loan. While the fiscal pre-emption from
the banking system will remain the same, it will partly shift from the gilt market
– which is already facing an excess supply of gilts – to the credit market,
where loan demand is coming off on rising lending rates.
Next up in India: Slowing loan demand on rising rates
India: Banking data (December 16), Wednesday, 28 December 2011.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Pledging SUUTI shares: A bit of
fiscal ‘relief’
Bottom line: FY12 Center’s fiscal deficit still 5.8% of GDP
We have cut our FY12 Center’s fiscal deficit forecast by 30bp, to 5.8% of
GDP, after officials told the media that they would fund the budgeted
Rs400bn of PSU divestment by pledging SUUTI shares. That said, we cannot
say that we would recommend this kind of fiscal engineering beyond a crisis
year. In any case, we still expect Delhi to overshoot its budgeted 4.6% of
GDP fiscal deficit target by over Rs1000bn on higher oil subsidies.
Nonetheless, today’s government plan does ease pressure on gilts at the
margin. Given that the government has additionally raised Rs530bn through
dated paper and about Rs250bn through T-Bills, it should not have to borrow
beyond an extra Rs100-200bn, assuming issuance of Rs200bn of Cash
Management Bills. This should get funded by the RBI OMO of Rs400bn that
we expect in January. This, in turn, backs our standing call of the 10y settling
about 8.5% levels. For details, do read our 2012 India Year Ahead here.
Key points: Delhi’s SUUTI proposal to divest PSU stock
Delhi plans to transfer shares and real estate owned by the Specified
Undertaking of the Unit Trust of India (SUUTI) to a newly set up fund
manager by January 15. A government entity, SUUTI was formed in 2003 to
take over the UTI’s US 64 and assured return schemes.
The fund manager will pledge the private sector stocks – such as ITC, Axis
Bank and Larsen & Toubro – it will receive, with banks to raise loans to buy
government stakes in public sector undertakings (PSUs).
This should enable Delhi to raise the Rs400bn it had budgeted from divesting
PSU shares. As of this date, it has collected only Rs11bn from divestment in
the Power Finance Corporation. On our part, we had assumed that the
government would be able to collect only Rs200bn by way of divestment.
With greater visibility of Rs400bn being raised, we have cut our FY12
Center’s fiscal deficit forecast by 30bp, to a still-above-consensus 5.8% of
GDP (Table 1). We forecast the Center’s fiscal deficit at 6.1% in FY13.
As it has not been able to divest PSU stock to investors, the government thus
plans to raise money from banks via loans against shares, rather than issuing
gilts to them. If market conditions improve, the fund manager will sell the PSU
stock to investors and repay the bank loan. While the fiscal pre-emption from
the banking system will remain the same, it will partly shift from the gilt market
– which is already facing an excess supply of gilts – to the credit market,
where loan demand is coming off on rising lending rates.
Next up in India: Slowing loan demand on rising rates
India: Banking data (December 16), Wednesday, 28 December 2011.
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