The upward movement in interest rates has presented consumers with difficulties in obtaining loans at affordable terms, research firm Simonis Storm has said.
Specifically, car loans typically involve a rate of prime plus 2 percentage points, which implies that current car loan rates stand at 13.5% on average.
”While household instalment and leasing credit has experienced a growth rate of 3% y/y in April, it lags behind the growth rate of corporate instalment and leasing credit, which registered an increase of 13% y/y in the same period.
“Moreover, a significant number of car loan applications are being rejected by banks, primarily due to clients facing challenges in meeting the stringent requirements imposed by financial institutions or carrying existing excessive debt burdens and cannot be further indebted without raising default risks. This aspect serves as an additional contributing factor to the decline in new car sales, as reported by various local car dealerships we engaged with,” the firm said.
The automotive industry has witnessed a continuous downward trend in vehicle sales since reaching its peak of 1,226 units in March 2023, as evidenced by the sale of only 982 vehicles in May 2023. This figure falls below the six-month moving average, indicating a persistent below average trend. This represents the lowest number of vehicles sold since February 2023.
Specifically, there has been a decline of 2.2% m/m and a modest YTD increase of 3.2%. On an annual basis, vehicle sales rose by 27.7% y/y in May 2023, compared to 11.6% y/y in April 2023. YTD, the number of units sold is trending above sales levels recorded in the last four years. Local dealerships have reported a mixed pattern of demand during 2023 thus far.
High-end models have displayed positive demand, contrasting with flat to negative demand for low-end models. This divergence suggests the presence of inflationary pressures affecting the middle class, which is typically associated with the consumption of low-end vehicle models.
“In addition to rising interest rates and higher living costs, the main concerns and risks to vehicle sales going forward include supply constraints, competition from more affordable brands offering similar vehicles (such as Jac and Mahindra) and changing consumer behaviour. Consumers are opting to keep their vehicles for longer periods and are more inclined to choose extended warranties rather than purchasing new cars on a frequent basis.
“These factors create challenges for the local dealerships in maintaining sales growth and meeting customer demands. Inflation figures for the operation of personal transportation sub-category reached its peak in September 2022, declined below vehicle inflation, and then picked up again slightly in May 2023. In May and April 2023, vehicle prices increased by 6.7% y/y. The cost of shipping goods, including vehicles, remains relatively high, and these costs are ultimately passed on to consumers,” said the firm.
The firm further explained that the Baltic Dry Index (BDI), which measures shipping rates, is currently at 18.1% of its peak during the pandemic at the beginning of June 2023. This suggests that shipping rates have mostly returned to normal levels, potentially exerting deflationary pressures on vehicle imports. Therefore, although shipping cost are decreasing in US dollars, the weak Rand still implies upward pressure on shipping cost for local car dealerships.
“If it weren’t for the weakening trend of the Rand, these lower shipping costs would likely contribute to lower car inflation. Over the past 12 months, the Rand has depreciated by 25.7%, while annual monthly vehicle inflation has averaged 6.3% since the start of 2023. Local dealerships are still looking at 2% to 5% (depending on the brand) increase in car prices per quarter on average for the rest of 2023. Local car dealerships are still facing issues with getting enough cars in stock and fulfilling all the pending orders from local customers.
The car manufacturers (OEMs) had promised to address this problem by 2Q2023, but they haven’t been able to fulfil that commitment. The distribution of cars has been disrupted due to shipping difficulties (i.e. inefficiencies at South African ports) and political unrest in South Africa, also adding to why domestic vehicle sales are low in May 2023. Furthermore, the car manufacturers have decided to focus on producing 75% of low-end models for the rest of the year. However, it’s uncertain if this decision matches the current demands of the market.”
In Namibia, passenger vehicles lead the market with 505 units sold, followed by light commercial vehicles at 409 units, 39 extra heavy vehicles and 22 medium commercial vehicles in May 2023. Passenger vehicle sales showed strong growth of 25% y/y and a monthly increase of 7.9%m/m in May 2023. Commercial vehicles experienced significant annual growth of 32.4% y/y (from a low base), but declined by 13.5% m/m in May 2023.