BMI View Playing Out As Exports Dip
Over the first 10 months of 2013, vehicle production in Argentina increased 9.3% year-on-year (y-o-y), to 683,899 units. On the back of a dip in export volumes, however, this represents a moderation in the growth rate over the last four months, after strong increases in Q213 ( see graph). Over the year-to-date, output has been buoyed by growth in domestic sales and exports. We expect these dynamics to continue to drive vehicle production over the year, although we expect growth to moderate over the coming months, in line with the recent figures. Accordingly, we maintain our 2013 forecast for an 8% production increase.
However, we highlight that there are a number of both upside and downside risks to this forecast. The timing and scale of an eventual currency devaluation could alter our outlook considerably, and a breakdown in trade negotiations with the country's main export partner, Brazil, could hamper growth over the year.
|Output Moderates As BMI View Plays Out|
|Argentina Monthly Vehicle Production, units|
Sales Buoyed By (Unsustainable) Currency Effects
In the first 10 months of 2013, vehicle sales in Argentina increased 19.1% y-o-y, to 799,676 units. The market has registered sharp increases over the last few months ( see graph), in line with recent improvements in broader measures of private consumption ( see 'Stronger Q213 Poses Upside Risk To GDP', September 12). Further, currency effects have played a large part in this strong year-to-date growth in autos sales. We expect this growth rate to moderate slightly over the last months of the year due to high base effects from Q412, and forecast 17% growth for the segment in 2013. We caution, however, that such growth may prove to be unsustainable in the longer term, and there are considerable downside risks to our forecast.
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 recent surge in sales growth.
|Growth Set To Slow On High Base Effects|
|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. 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.
A devaluation 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
Vehicle exports in Argentina increased 14.2% y-o-y over the first 10 months of 2013, to 375,690 units. We 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. After months of sustained growth, the last three months have registered declines on the back of lower sales in the country's main trading partner, Brazil. 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.
|Argentina 10M13 Export Destinations, %|