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A market without buyers: Will 2018 revive automotive sales?
Egypt’s automotive market suffers from stagnation due high inflation and interest rates
 
 
 
Egypt's automotive market suffers from stagnation
 

Automotive sales in Egypt decreased by 40 percent in 2017, as consumers saw their purchasing power fall after the liberalization of the exchange rate in November 2016 precipitated a sharp drop in the value of the pound.

At the start of a new year, automotive traders and manufactures told Mada Masr they aren’t too optimistic the market will regain its former bustle. They expect the increasing price of cars to remain beyond the budgets of most consumers in 2018, who are offered little in the way of aid from costly loans.

Spiraling prices

In October 2016, Khaled Kamal, the managing partner of an IT company, went to a car dealer to ask about the price of a Mazda he wanted to buy. The dealer told him the car cost LE270,000. Kamal returned two days later ready to purchase the car, but he found that the price had already risen by LE15,000.

The difference in price prompted Kamal to reconsider. But when the price rose for a second time to LE300,000 a week later, he decided not to wait any longer. It was now or never, so he bought the car.

The fluctuations in the price of the Mazda that Kamal eventually bought were caused by the rapid appreciation of the US dollar exchange rate. It was October 2016, a month before the Central Bank of Egypt (CBE) decided to liberalize the country’s currency in an attempt to prevent the free fall of the pound. While the official rate of US$1 was LE8.88 on the exchange market, it had risen to between LE16 and LE17 on the black market during the time Kamal was making his purchase.

Soon after the CBE liberalized the exchange rate, the official price of $1 rose to LE18. The cost of the Mazda increased again to LE398,000 just a few days after Kamal bought it.  

Kamal’s story is just one example of how automotive prices have increased in Egypt over the last year and it gives us an indication of the impact the decision to float the pound had on the local market. If Kamal had postponed his decision, he wouldn’t have been able to afford the Mazda.

A sizeable sales drop

“2017 may well be the worst year for the automotive market in a long time. Whoever claims otherwise is joking,” said Effat Abdel Aty, head of the automotive dealers, distributors and importers division at the Cairo Chamber of Commerce.

Figures gathered by the Automotive Marketing Information Council (AMIC) show that automotive sales in the first nine months of 2017 were 38 percent lower than in the same period of 2016. Compared to the 156,000 vehicles that were sold between January and September 2016, only 96,200 were sold in the same period of 2017, according to an AMIC report obtained by Mada Masr.

Abdel Aty attributes the decline in sales to the November flotation, which caused the price of cars to skyrocket. He previously sold a Chinese Victory nine-passenger van for LE85,000 in 2016 when the black market price for $1 was LE13, but the same car now sells for LE192,000, with the exchange rate sitting at $1 to LE18.

The impact of the flotation is particularly apparent in the finances of the only listed automotive company in Egypt: GB Auto.

For the first time in years, the company posted steep losses in the first nine months of 2017. It’s annual losses registered LE475.5 million, compared to between LE100 million and LE200 million in profits during the preceding five years.

GB Auto CEO Raouf Ghabbour told the media in November that the main reason behind the slowdown in sales is the inflation that followed the flotation. In Ghabbour’s estimation, consumer demand for automobiles will not rebound to its pre-float level for at least two years.

2018 doesn’t promise much

Raafat Masrouga, the honorary president of AMIC and the former CEO of the Engineering Automotive Manufacturing Company (EAMCO), told Mada Masr he does not expect 2018 will be much different from 2017.

Masrouga says that the automotive market usually grows on par with the national economy. Therefore, he adds, if expectations for the latter turn out to be accurate, at around six percent of gross domestic product, growth won’t translate into a significant increase in car sales, as a six percent increase would be equivalent to an increase in overall sales by 9,000 in 2017, and projections of 130,000 in 2018. This is a far cry from previous sales volumes in 2016 of 198,000, and in 2015 of 278,000.

“Inflation will remain high in 2018, even if it is lower than 2017, and consumers will not feel secure enough to be able to re-accumulate their savings after spending them on expensive goods, like a new car,” Masrouga says.

Masrouga also points to initiatives that were touted to prop up demand, such as the local automotives manufacturing strategy, which aims to incentivize investment in locally manufactured automotive components through legislation. There is also Nasr Automotives Company’s plans to restart local automotive manufacturing, he adds. This initiative was not launched, however, as legislation for the local manufacturing strategy was sent back to the government for revision after months of discussion in Parliament, and has so far not resurfaced, according to parliamentarians Mada Masr spoke with.

In contrast, Hussein Mostafa, the managing director for the Egyptian Automobiles Manufacturers Association (EAMA), is more hopeful. Mostafa tells Mada Masr he believes several factors will help the automotive market climb out of its slump, including a growing economy, rising tourism revenues and the start of production at the Zohr natural gas field.

Mostafa is optimistic about steps to boost local manufacturing, pointing to the local manufacturing strategy bill, despite the fact that Parliament has yet to pass the legislation. He says the bill will eventually be a successful step, as the components will not only serve the local market, but can also be exported. He believes the government should take initiative to make sure funding is available for consumers to buy cars. However, he thinks current interest rates are too high, adding that the Egyptian automotive market is already significantly dependent on loans, which finance between 60 – 70 percent of all car sales.

The government may take action, if not exactly how Mostafa envisages. The consumer protection act may see intervention from the state in the form of the Consumer Protection Authority (CPA). The piece of legislation that is currently being discussed in Parliament would categorize automobiles as “strategic goods,” granting the authority to set price controls pursuant to approval from the Cabinet, according to the privately owned Al-Borsa newspaper.

Under the legislation, automotive dealers have to adhere to transparency measures, and there are a bevy of penalties for noncompliance with safety standards, ranging from LE500,000 to LE2 million. The law also prohibits dealers from placing customers on waiting lists, implementing premium pricing and hoarding stock.

Will decreasing customs help?

Some consumers are hopeful a decrease in customs on automotives at the start of the new year will affect prices. The Egyptian Customs Authority has been gradually decreasing customs on European cars since 2011, at a rate of 10 percent per year, as per the EU-Egypt Association Agreement signed in 2004. However, the head of the customs authority Magdy Abdel Aziz, as well as a number of sector pundits, have said that consumers won’t feel any real difference, despite the fact that the tariff reduction is likely to reach 80 percent in 2018.

Masrouga says that customs on European 1600 cc engine cars stood at 40 percent of the car’s value in 2017, which means the 10-percent annual reduction will only amount to a 4-percent drop in the tariff this year. In concrete terms, this means that if a car is sold for LE400,000, the reduction will be a relatively meager LE16,000.

That’s not the whole story, however, according to Masrouga, who says an inflation rate of 1 – 1.5 percent in European countries, in addition to the liberalized exchange rate that makes European automotives more expensive, will render the difference negligible.

The favorable price position European automotive manufacturers enjoy gives them the freedom to raise prices even higher, as they have the advantage of tariff cuts unavailable to competitors outside the agreement, says Masrouga. Therefore, they can sell cars at higher prices, effectively erasing any price easing in the final stages.

Expensive loans

High interest rates have affected the demand for loans to purchase new automotives, despite the growing need for financing amid soaring prices. Banks have registered a decrease in loans issued for automotive purchases in 2017, and the interest rates on these loans revolves around the 20 percent mark.

After the government decided to liberalize the exchange rate, the CBE raised interest rates several times to rein in inflation, with the overnight lending rate reaching 19.75 in July 2017.

Ahmed al-Rifai, a construction engineer, shares a car with his wife, despite the fact that they work on different sides of Cairo. He was planning to buy a new car in 2016, with his sights set on a Toyota Corolla or a Kia Cerato, the prices of which ranged from LE180,000 to LE200,000 at the time.

Rifai’s plan was to put down a LE100,000 deposit and take out a loan for the remaining value of the car. The interest rate on loans at the time was seven to eight percent, as far as Rifai remembers. After the devaluation, however, the price of the Toyota Corolla and Kia Cerato jumped to above LE400,000. At the same time, interest rates on car loans rose to 17 percent, after the CBE raised the cost of lending when they liberalized the pound.

“When I was intending to buy a car, the loan installments would have cost me between 15 to 20 percent of my salary. Now, they would cost between 35 and 40 percent,” Rifai says, adding that this means he has no option but to take long, costly Uber rides five times a week from his home near downtown Cairo to his work in a suburb of the city.

“I completely overlooked the idea of buying a new car after the inflation and the rising prices of everything else,” he says. “The car is no longer a priority. I just can’t afford it any longer.”

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Osman El Sharnoubi