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Egypt automotive market under pressure amid elevated inflation, high borrowing costs - Daily News Egypt

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Egypt automotive market under pressure amid elevated inflation, high borrowing costs

Vehicle prices on the rise despite lower demand, says BMI Research

Amid surging inflation and high borrowing costs, Egypt’s automotive market seems under pressure, with most consumers forgoing their plans to buy new vehicles in favor of sustaining life’s burdens.

Data released by the Automobile Information Board (AMIC) showed that car sales in May 2017 fell by 45% compared to the same month of 2016.

The market witnessed sales of 10,270 units, versus 18,800 units in 2016, according to the report of AMIC.

The report showed that the demand for passenger cars fell by 48%, recording 7,100 vehicles, compared to 13,600 in May 2016.

AMIC attributed the fall in car sales to the large price differential witnessed across the automotive market in recent months, especially since the beginning of 2017.

Car Prices doubled

For Mariam Salah, a 30-year-old Egyptian woman, buying a new car is getting harder.

“I have been trying to buy a new car since the end of last year, but prices have doubled in almost six months,” Marian told Daily News Egypt.

Price hikes across 153 car models from different automakers have been almost doubled since July 2016, according to data seen by Daily News Egypt.

“First of all, I tried to buy a car for about EGP 80,000. The price of this car now in the market hit EGP 160,000. Now I am thinking about buying a used car. Having a new one is just a dream now,” she added.

A recent research note issued by BMI Research has noted that passenger car sales in Egypt will continue to fall in 2017, as elevated inflation and high borrowing costs weigh on consumer spending power.

“We expect passenger car sales in Egypt to experience another year of decline in 2017, underpinned by our weak outlook for the Egyptian consumer. Over the course of 2017, we expect elevated inflation and high borrowing costs to continue to squeeze consumer spending power, translating to a fall in new car purchases. As a result, we forecast passenger car sales to fall 17.5% in 2017, following an estimated contraction of 25.0% in 2016.

High borrowing cost to dent car sales

Dina Diaa was planning to get a banking loan to finance buying a new car.

But after the Central Bank of Egypt raised interest rates by 4% in two months, she changed her mind.

“I have contacted about three local banks. The best offer was paying almost double the car’s price in five years. That’s too much to afford,” Diaa told Daily News Egypt..

The central bank raised key interest rates by 2 percentage points earlier this month, its third increase since Egypt floated its currency in November last year.

The interest rates have surged 7% so far to stand at 18.75%.

Khalid Saad, a member of the board of directors of the Bavarian Automotive Group and general manager of Brilliance Egypt, predicted the continuation of the decline in sales, especially after the Central Bank of Egypt’s (CBE) decision to increase the interest rate on deposits and loans by 2% came in favour of citizens who do not have direct investments in the local market; however, it does not support the investment movement, especially in the automotive sector.

In addition to that, 70% of the sector’s sales rely on the loans provided to customers, while only 30% of purchases rely on cash, according to Saad.

Saad also mentioned that the decision will backfire on car sales, as he explained that the customer who depends on loans does not have sufficient liquidity to pay in cash, so the number of customers will eventually decrease.

According to the AMIC report, the demand for locally assembled cars fell by 41.8% to 24,935 units from the beginning of the year until the end of May, compared to 42,863 units during the same period in 2016, while imports decreased by 49.5% , selling 21,436 vehicles compared to 42,447 in 2016.

Sales of locally assembled passenger cars fell 36.6% to 15,110 vehicles, versus 23,838 vehicles in 2016. Sales of imported passenger cars also fell 48.1%, selling 18,033 vehicles, compared to 34,739 vehicles the previous year.

Domestic bus sales fell 59.9%, selling 2,455 buses instead of the 6,115 units sold in 2016, while sales of imported buses decreased by 38.6% to record 2,581 buses, compared to 4,207 buses last year.

Domestic lorry sales decreased by 42.9% to 7,370, compared to 12,910 in the corresponding period of last year, while the sales of imported lorries decreased 76.5% to record 822 lorries sold during the first five months of this year, compared to 3,501 lorries during the same period of 2016.

BMI Research said in another research note that the pound’s weakness will translate into higher prices for components used to produce vehicles domestically, which will be passed down to consumers in the form of higher vehicle prices.

“Furthermore, the devaluation of the pound will also see prices of imported vehicles rise, as these are paid for in foreign currency, thereby translating into a fall in both imported and domestically produced vehicle purchases,” the note added.

“We expect the rise in inflationary pressures resulting from the devaluation to lead to a further hike in interest rates in 2017, translating into a fall in vehicle financing applications as borrowing costs rise further. Our country risk team forecasts interest rates to end 2017 at 18.75%, up from an estimated 15.75% in 2016. These high interest rates will drag on consumer appetite for credit, leading to a fall in auto loan demand and, in turn, financing of new vehicle purchases,” the report finished.

Egypt automotive market in brief

The automotive business in any country is one of the most important engines of their economy. In Egypt it contributes a substantial proportion of GDP. The auto industry actually began in Egypt in the early 1960s with the El-Nasr Automotive Company, one of the leading companies in the business and comparable with many car factories across the world, including the Far East and its Asian Tigers.

The industry was already prospering in the early 1980s with the Egyptian GM plants and Suzuki Egypt.

From then on, automotive plants continued to proliferate to more than 15 assembly plants for cars, buses, and trucks. This attracted investments that have now exceeded $5 billion. To support the huge auto component sector, there are over 250 factories that supply many of the parts needed in the automotive industry for vehicles of all kinds, currently supplying 70% of all components.

This integrated industry has directly created more than 350,000 jobs for plant workers, engineers, and other employees; add to that the workers from services indirectly associated with this industry, and that total increases by some 250,000. The initial high investments now generate higher incomes compared with other sectors of Egyptian industry.

Production figures have registered a noticeable growth over the past year. The latest report from the Automotive Marketing information Council (AMIC) in Egypt records sales figures close to 450,000 units, an increase of nearly 50% over 2015. Locally assembled vehicles, around 145,000 units, account for 49%, an increase of 57% over 2015. Units imported from abroad and not included in the AMIC sales figures bring added weight to the steady growth in the overall market size.

Currently there is a plan to boost local production to a total of 500,000 units (all vehicle types) by 2020, to match a similar total of imported vehicles, reaching a combined total of one million units. This forecast is dependent on achieving a number of goals, including car import duty rates dropping to zero as per the agreement with the European Union. This will be arrived at through a series of annual reductions of 10% up to 2019.

Officials realise the importance of these goals by taking several precautionary measures and recognizing the importance of making Egypt an attractive location for automakers to augment and expand their plants to cover the demands of markets on the African continent and in the Middle East.

In Egypt, manufacturers will be able to expand production by taking advantage of low labour rates and the depreciation of the Egyptian pound against foreign currencies.

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