Further Subsidies Unlikely To Be Effective
The Brazilian government is seeking to boost the domestic autos industry by improving access to credit. BMI believes that, while improving access to credit did help boost the autos market in the past, further attempts to increase autos loans are unlikely to be effective in 2014, as consumer sentiment and appetite for big-ticket purchases is likely to remain weak over the year.
Moreover, historical evidence suggests that such policies do not 'create' new levels of demand, but rather bring forward purchasing decisions to take advantage of temporary incentives. The Brazilian government used this policy in 2012 to effectively boost sales over the year, but the market contracted sharply in 2013 as purchasing decisions were brought forward to 2012 and broader measures of consumer sentiment waned. Retail sales and appetite for big-ticket purchases remains poor in 2014, and we expect autos sales to decline further over the year.
|Consumer Weakness To Weigh On Sales|
|Brazil Monthly Passenger Car Sales, Units|
Market Weakness To Continue
In the first three months of 2014, passenger car sales in the country declined 4.9% year-on-year (y-o-y), to 583,264 units. BMI forecast a 3% decline in this segment in 2014, as the broader slowdown in consumer spending and higher car sales taxes impact the segment (see 'Autos Sector Deteriorates In Line With BMI View', April 8). We maintain our bearish forecast for now, despite the likelihood of further attempts to buoy the market from the government, as we believe the ongoing deterioration in consumer sentiment will continue to weigh on the segment.
We have also long held a cautious view on the rate of vehicle loan delinquency in the country; defaults on vehicle loans had previously been a substantial problem in Brazil, causing many banks to curtail the availability of credit to consumers. This may have tempered autos sales growth in recent years.
The Brazilian government has taken a number of measures to invigorate the domestic market in recent years. In 2012, it lowered the sales tax rate for domestically produced cars to 2%, from 7% previously, in an attempt to buoy domestic sales. Additionally, the central bank reduced the reserve requirements for banks, giving lenders the ability to boost credit for car purchases.
These measures were initially designed to last only a few months, but boosted the market significantly in Q312 and were extended multiple times and were eventually scheduled to finish at the end of 2013.
Rather than returning to the previous rate immediately, the government is to incrementally increase the sales tax over the course of 2014, in a bid to bolster sales. BMI believes, however, that this move will not serve to further increase the market significantly, as the weak consumer story will temper appetite for big-ticket purchases, in line with our bearish sales forecast.
The first incremental increase in the tax rate, to 3%, occurred in January; we believe consumers delayed their purchasing decisions when it first took effect, and pushed car sales into February. A further tax rate hike, up to 7%, is scheduled to take place in July, although this may be pushed back somewhat as sales continue to slide.