Price Ceiling Set To Lower Sales
Venezuela's National Assembly has approved the law regulating the purchase and sales of new and used vehicles in an attempt to alleviate shortages in the market and ongoing price speculation. The legislation, which now passes to the President to be enacted into law, will introduce a price ceiling and fines for car dealerships that attempt to charge a higher price. It is unclear when the legislation will come into effect.
BMI maintains a particularly bearish outlook on the sector, however, as we believe that such measures tackle the result of the problem (expensive used cars), and make no real attempt to resolve the root causes (high inflation and low supply of new cars). We believe that such policies may serve to limit new vehicle sales over the next few years as imports may dry-up. Further, it may cause the price of used cars to rise as the segment is driven into the black market.
Bearish Market Outlook
Vehicle sales in Venezuela declined 16.1% year-on-year (y-o-y) in the first seven months of the year, to 65,966 units. We hold a bearish outlook for consumer sentiment, and maintain our forecast for a 19% decline in the market in 2013 ( see 'Bearish Market Sentiment Remains', August 12 ).
In this seven-month period, sales of domestically-produced vehicles declined 34.4% y-o-y, to 43,329 units, while sales of imported vehicles increased 79.7% y-o-y, to 22,637 units. This increase in imported vehicles is due to the paucity of domestically-produced cars and low-base effects. Historically, sales of domestically-produced vehicles have dominated the market. However, production in the country has curtailed significantly in recent months, creating a shortage of vehicles available to buy. We believe that, as imported vehicles constitute a larger part of the sector, the weaker currency will have a more substantive impact on sales volumes over the year as imports become more expensive.
We believe that the poor macro picture in Venezuela will continue to impact vehicle sales over the year. The government's currency devaluation in February will pose a considerable upside risk to inflation, hike interest rates for vehicle loans, and make vehicle imports more expensive, thus eroding consumers' purchasing power and affecting sales volumes ( see 'Inflation Will Remain Elevated', August 8 ). We expect this to continue to filter through to consumer sentiment over the course of the year.
We see little upside risk to sales from the government's new price ceiling, as the lower prices of cars will not attract many new consumers into the market; vehicle demand already far outstrips supply as manufacturers struggle to produce sufficient volumes and the waiting-lists for new cars are reported to stand at many months.
We highlight that a possible side-effect of the government's price ceiling for new vehicles could be to limit vehicle imports. The weakness in the currency serves to make them very expensive in local currency terms; if this is over the price ceiling, it would not be possible to sell them in the market. Were this to happen, importers could either take a loss on the cars, or stop importing the vehicles. We believe the latter outcome is more likely. This poses considerable downside risk to our sales outlook over the next few years, as a drop-off in imports would create a significant shortage of vehicles available in the country.
Currently, we forecast a 9.2% drop in vehicle sales in 2014, as we expect many of the market dynamics currently impacting the market to remain pertinent. The potential drop-off in imports may cause us to revise this downward.
Tackling Results Not Causes
The country continues to face a shortage of US dollars as people increasingly wish to keep their money abroad. This shortage of US dollars has led to a shortage of consumer goods, including cars. Indeed, throughout 2012, a number of producers faced a shortage of parts because the imports were unavailable, and dealerships suffered from a lack of vehicles. We expect this to continue as inflation rises.
BMI has long highlighted that cars are often bought in Venezuela as a store against inflation. Cars usually gain in value once they are purchased, instead of depreciating as in most markets, because of the paucity of vehicles available.
BMI believes that this new bill tackles the results of the problem (overly expensive used cars), not the causes (high inflation and paucity of vehicle supply), and will therefore do little to really resolve the issue. Indeed, BMI has long maintained that in order to see sustained growth in vehicle production, the regulatory environment needs a complete overhaul, particularly in the issuance of assembly permits and access to foreign currency. We expect to see an increase in inflation in 2013, which will exacerbate the problem. Furthermore, we caution that such policies may see the emergence of a large black market for used cars, which may even drive the cost of used cars higher than previous levels as availability decreases and such markets are dominated by criminal elements.