Production Plummets As Unsustainable Dynamics Unwind

In November, vehicle production in Argentina contracted by 20.2% year-on-year (y-o-y), to 62,186 units, on the back of a slowdown in both the domestic and export markets. This is broadly in line with BMI's expectations, as we believed the earlier uptick was built on unsustainable dynamics.

Indeed, vehicle output has slowed down considerably in recent months after surging earlier in the year ( see graph), in a similar trend to domestic sales and exports. Over the 11 months of the year to date, vehicle production has increased 6.1% y-o-y, to 746,085 units.

On the back of the substantial decline in output in November, we are revising our 2013 vehicle production forecast to 5% growth, down from 8% previously. We expect domestic sales and exports to continue to weigh on output.

Production Drop Prompts Forecast Downgrade
Argentina Monthly Vehicle Production, units

Production Plummets As Unsustainable Dynamics Unwind

In November, vehicle production in Argentina contracted by 20.2% year-on-year (y-o-y), to 62,186 units, on the back of a slowdown in both the domestic and export markets. This is broadly in line with BMI's expectations, as we believed the earlier uptick was built on unsustainable dynamics.

Indeed, vehicle output has slowed down considerably in recent months after surging earlier in the year ( see graph), in a similar trend to domestic sales and exports. Over the 11 months of the year to date, vehicle production has increased 6.1% y-o-y, to 746,085 units.

On the back of the substantial decline in output in November, we are revising our 2013 vehicle production forecast to 5% growth, down from 8% previously. We expect domestic sales and exports to continue to weigh on output.

Production Drop Prompts Forecast Downgrade
Argentina Monthly Vehicle Production, units

Sales Buoyed By (Unsustainable) Currency Effects

Vehicle sales in Argentina increased 6.9% y-o-y in November, to 75,274 units. Over the first 11 months of the year, sales have increased 18% y-o-y, to 874,950 units.

The market registered sharp increases in Q313 ( see graph), in line with improvements in broader measures of private consumption ( see 'Potential For Growth To Accelerate In 2014', November 28). Further, currency effects have played a large part in this strong year-to-date growth in autos sales. We expected this growth rate to moderate slightly over the last months of the year due to high base effects from Q412, in line with the November figure, and maintain our forecast for 17% growth in 2013.

The majority of vehicles sold in the country are imported owing to the relatively small size of domestic production. Imported cars are priced in dollars, but can be bought in pesos exchanged at the official rate; if a buyer pays for the car in pesos bought on the black market (the implied rate), it will be considerably cheaper. Reports suggest that imports of luxury cars into Argentina have surged over the year, as the country's weak consumer story has little impact on this segment. We believe that this, at least in part, helps explain the surge in sales growth.

Market Moderating
Argentina Monthly Vehicle Sales, units

Government efforts to restrict access to foreign currency and limit the weakening in the peso have caused the black-market rate to increase dramatically in the last year. Argentine President Cristina Fernández de Kirchner has sought to dismiss rumours of an impending currency devaluation ( see 'ARS: Faster Depreciation Likelier Than One-Off Adjustment', September 4). We acknowledge that there is growing risk that Argentina will avoid the one-off devaluation that we forecast for this year by accelerating the rate at which it allows the peso to depreciate, with the first half of 2013 seeing the most rapid rate of depreciation since 2009. That said, the drawdown in foreign currency reserves is accelerating, and import cover continues to fall, suggesting that there remains substantial pressure on the country's external accounts.

Depreciation in the official rate is likely to reduce the spread between the official rate and the black-market rate (although there is a risk that the black market could devalue further on the back of this). This convergence would serve to dampen the effect of buying imported cars in dollars, and would moderate growth in the market later in the year. Further, a devaluation in the currency would make all vehicle imports more expensive and further dampen consumer sentiment and purchasing power.

We caution that, if inflation continues to escalate, Argentine consumers may start to purchase vehicles as a store against inflation, as we have seen in Venezuela ( see 'BMI Remains Bearish As Legislation Tackles The Results Not The Causes Of Problem', January 25). This would serve to drive sales, but would lead to a huge increase in used car prices and further exacerbate inflation problems.

Export Growth To Moderate Somewhat

Argentina's vehicle exports declined 24.6% y-o-y in November, to 33.733 units. Over the year to date, exports have increased 9.5% y-o-y, to 409,423 units.

After a period of sustained growth, the segment has registered declines in recent months on the back of lower sales in the country's main trading partner, Brazil. We still expect to see growth in this segment in 2013 as weakness in the currency makes exports more competitive, although it is likely to wane somewhat, in line with recent figures. As the pie chart shows, the majority of Argentina's autos exports go to Brazil as part of the Mercosur trading bloc- declining sales volumes in Brazil over the last few months due to strong base effects in Q312 have been the primary driver of this decline.

Brazil Dominates
Argentina Export Destinations, 11m13, %
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