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Auto volumes to drop by 25% in 2023

Karachi, May 26, 2022: The auto sales volumes and margins are expected to remain under pressure in the financial year 2023 due to record rupee depreciation, inflation reaching alarming levels, multiple rounds of price hikes, higher freight rates, and restrictions on auto financing by the SBP.

The first sign of weakness in demand was witnessed during April when auto sales declined by 17% MoM and this trend will continue in the coming months with some respite from recently launched models such as City, Civic (HCAR) and Swift (PSMC).

“Hence, the auto industry volumes will decline more by 25% YoY. Despite having more exposure to auto financing, sales decline for HCAR and PSMC is expected to be in the same range owing to the recent model launches,” said Wasil Zaman at JS Research.

Ban on imports to contain BOP crisis

In an attempt to contain the balance of payments crisis, the current government has placed an import ban on luxury items which include automobile imports (CBUs).

Devaluation of PKR

The PKR over the past couple of quarters has witnessed steep devaluation owing to rising economic and political concerns devaluing by 22% during FY22 and crossing the Rs 200 mark last week.

With heavy reliance on imports for auto parts (53% localization in the industry), the auto assemblers have announced multiple rounds of price hikes since Nov-2021 onwards and are expected to continue amid further devaluation.

Inconsistent Budget measures

The previous government had reduced taxes (FED by 2.5% for all engine capacities and sales tax for less than 1000cc cars) on autos during the federal budget for FY22. This spurred sales volume in the industry through most of the year where sales posted a stellar growth of 50% YoY during 10MFY22.

In Jan-2022 however, the government through the mini budget had reversed most of the tax benefits announced earlier which was fully passed on by the auto assemblers.

Looking back, during the Federal budget FY20, the government had announced the imposition of FED on autos ranging from 2.5 percent-7.5 percent (depending upon engine capacity) which contributed towards the decline in industry sales by 53% YoY FY20.

Changes in auto financing rules by SBP

In Sep-2021, SBP announced a series of measures to control imports in the sector of both CBU and CKD kits. The central bank prohibited auto financing for imports while for local vehicles, maximum tenure of auto financing for 1000cc+ vehicles was reduced from 7 to 5 years.

Furthermore, total financing was capped at Rs3 million while minimum down payment requirement was increased from 15% to 30%. Although the measures did slow the momentum of growth, auto financing since the implementation of these measures has increased from Rs 338.2 billion in Sep-2021 to Rs 366.8 billion in Apr-2022.

More recently, the SBP has announced a further reduction in the maximum time limit of auto loans by 2 years for all vehicles which means for vehicles above 1000cc maximum tenure of auto financing is now capped at 3 years (previously 5years) while for vehicles below 1000cc the cap is 5 years (7 years earlier).

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