Fighting And Inflation Will Lead To Market Contraction

BMI View: The worsening conflict in Iraq will lead to a 12% contraction in the new car market in 2014, as spending priorities change and trade routes are at risk. Rising inflation will also contribute by pushing up prices of new cars. The market will not return to its 2012 level by the end of our forecast period in 2018.

The worsening security situation in Iraq, particularly around the key autos market of Kurdistan, has prompted us to revise down our car sales forecast for 2014. In line with our view that security would be one of the biggest threats to the industry during the year, the announcement of US airstrikes, as well as potential disruption to trade routes for importers, mean the strong start to the year will end in a contraction of the market ( see 'Security And Instalment Plan Creates Car Sales Balancing Act', June 3). While much will depend on the duration of the conflict, we forecast a decline of 12.0%, with average growth for the rest of the forecast period from 2015-18 limited to 3.0% as increased inflation carrying over to 2015 also hits purchasing power.

Car sales in H114 have been reasonably buoyant, with Ghabbour Auto (GB Auto), the distributor for Hyundai  Motor in Iraq, posting sales volume growth of 40.0% year-on-year (y-o-y) in Q214 and 4.0% y-o-y for H114. However, the company's quarterly statement for Q2 anticipates worsening conditions in H214 following the surge in violence in mid-June and this is borne out by data released by Renault, which show the total market contracting 14.8% y-o-y in June. This took the year-to-date growth from 6.4% y-o-y for 5M14 to just 0.6% as of H114, to 61,204 units.

Security Threatens Five-Year Growth
Iraq Vehicle Sales And Growth

Fighting And Inflation Will Lead To Market Contraction

BMI View: The worsening conflict in Iraq will lead to a 12% contraction in the new car market in 2014, as spending priorities change and trade routes are at risk. Rising inflation will also contribute by pushing up prices of new cars. The market will not return to its 2012 level by the end of our forecast period in 2018.

The worsening security situation in Iraq, particularly around the key autos market of Kurdistan, has prompted us to revise down our car sales forecast for 2014. In line with our view that security would be one of the biggest threats to the industry during the year, the announcement of US airstrikes, as well as potential disruption to trade routes for importers, mean the strong start to the year will end in a contraction of the market ( see 'Security And Instalment Plan Creates Car Sales Balancing Act', June 3). While much will depend on the duration of the conflict, we forecast a decline of 12.0%, with average growth for the rest of the forecast period from 2015-18 limited to 3.0% as increased inflation carrying over to 2015 also hits purchasing power.

Car sales in H114 have been reasonably buoyant, with Ghabbour Auto (GB Auto), the distributor for Hyundai  Motor in Iraq, posting sales volume growth of 40.0% year-on-year (y-o-y) in Q214 and 4.0% y-o-y for H114. However, the company's quarterly statement for Q2 anticipates worsening conditions in H214 following the surge in violence in mid-June and this is borne out by data released by Renault, which show the total market contracting 14.8% y-o-y in June. This took the year-to-date growth from 6.4% y-o-y for 5M14 to just 0.6% as of H114, to 61,204 units.

Security Threatens Five-Year Growth
Iraq Vehicle Sales And Growth

We believe that a number of factors will result in the market declining further over H214. In addition to the fact that the conflict in the country will make big ticket purchases less of a priority, particularly as Kurdistan becomes more involved, there will also be logistical considerations. If trade routes are cut off by fighting this will impede imports of stocks. This has already been seen from the Syrian conflict, which disrupted a key trade route into Iraq for GB Auto in 2012.

Similar disruption to available stocks could come from domestic production plants being forced to scale back or temporarily close. So far there has been no news of any facilities halting production, although it cannot be ruled out if carmakers believe their operations are at risk. However, there are signs that multinationals are happy to go on with their business, as GK Auto, GB Auto's joint venture with local firm Al-Kasid that distributes for Hyundai, announced an extension to its logistics contract for the country with Gefco in early August.

Pricing pressures will also be a threat to sales, however, as our Country Risk team expects inflation to increase in areas of the country still controlled by the government ( see 'Inflation Increasing In Government-Controlled Areas', August 7). As we expect this to worsen in 2015, based on our forecast for CPI inflation to average 5.5% in 2014 and 6.0% in 2015, this will continue to drag on any car sales recovery in 2015, which we expect to be limited to 4.9%. This impact on pricing and the uncertainty of how long the conflict will last means we now do not expect the market to return to its 2012 level of 126,000 units within our forecast period to 2018.

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