Fuel Price Hikes: Initial Thoughts
BMI View : While we see some short-term pain for the autos sector due to the legislated fuel price hikes and have downgraded our 2013 sales forecasts for each segment according to the impact we believe each will face, we remain bullish on the Indonesian autos market. In our opinion, the consumer story stemming from credit availability and rising disposable incomes, as well as the under-penetrated nature of the car market, continue to underpin the long-term opportunities in the sector.
We have been highlighting the increasing likelihood of fuel subsidy reform and the possible downside risk it poses to our vehicle sales forecast for some time. Now that the Indonesian government has finally approved legislation to hike prices of subsidised fuel ( see 'BI, Government Get Aggressive To Address Imbalances', June 19), we believe it is time to consider the impact it poses to the autos sector.
The price of 'Premium' fuel will be raised 44%, to IDR6,500 (US$0.65) per litre, from IDR4,500 (US$0.45) previously, and the price of diesel will be hiked 22%, to IDR5,500 (US$0.55) per litre, from IDR4,500 (US$0.45) previously. Besides being detrimental to short-term demand for new vehicles, the higher inflation which the fuel price hikes will bring about will contribute to an erosion of consumer purchasing power.
Negative Short-Term Impact To Car Sales
To be sure, we had maintained our forecast for 2013 auto sales growth at 10.7% back in May, despite vehicle sales for the first four months of the year experiencing a phenomenal 18.2% rise year-on-year (y-o-y). This is because of the confluence of headwinds such as possible fuel price hikes, a weakening rupiah and rising inflation, which we forecasted to rear their ugly heads in H213, leading to a slowdown in growth rates ( see 'Auto Sales Boom Defying Headwinds', May 9).
With the fuel price hikes finally legislated, we are have decided to downgrade our 2013 passenger car sales forecast to 8.5%, to 850,000 units, from 11.0% previously. While consumer credit will be tighter for the rest of the year given that our Country Risk team expects two more rate hikes in 2013 to counter the higher inflation brought about by higher fuel prices, we have slightly upgraded our long-term forecasts for the car market, as we see the country's spectrum of middle- class to wealthy consumers, who are the main drivers of sales in this segment, easily absorbing this increase in fuel prices in the medium- to long-term.
CVs Sales Fallout To Be Larger
However, we believe the commercial vehicle (CV) segment will bear the brunt of the fuel price hikes, in lieu of the expected rise in financing costs. Firms will reduce their fixed asset investment and may even put off some of their projects, causing CV sales to suffer.
We are downgrading our 2013 CV sales growth forecast to 4%, to 350,000 units, from 10% previously as. each of the sub-segments, which make up total CV sales, have been downgraded. Given that the impact to investment will be more drawn out, we have slightly lowered our long-term forecast for CV sales to take that into account.
|Indonesia - Passenger Car & Commercial Vehicle Sales, Units (LHS); Chg y-o-y, % (RHS)|
|2013 Downgraded But Long-Term Outlook Remains Bright|
This will then revise our 2013 vehicle sales growth forecast to 7.2%, from 10.7% previously, to 1.2mn units.
Motorbike Sales Will Also Take A Hit
Although the government has pledged to provide cash transfers to the needy to enable them to cope better with the expected rise in prices, we believe rural demand for motorbikes will still take a hit. Rural consumers, which form a large segment of motorbike buyers, are already facing other economic pressures. Farmers' incomes have taken a hit in recent months due to reduced export earnings from sliding coal and palm oil prices.
Furthermore, given that most motorbikes use 'Premium' gasoline, the fuel which will see a greater hike in price, many motorists will need to cutback on their consumption. It is likely that many rural consumers will also seek to hold off new motorbike purchases.
We are downgrading our 2013 motorbike sales growth forecast to 2.5% from 4.7% previously, and we have also reduced our long-term forecasts, up to 2017.
Secular Story Very Much Intact
All this said, it is important to put into context that after the hike, fuel prices in Indonesia will still remain one of the cheapest in Asia. Despite the tougher short-term outlook, we note that dominant local auto firms such as PT Astra have increased their investments in 2013, as they gear up to take advantage of long-term market opportunities.
Indeed, BMI believes that the drivers of growth in Indonesia's auto market remain very much intact. We see the increasing availability of consumer credit due to historically low interest rates, rising disposable incomes of consumers, which are propelling more of them into middle-class ranks, and the under-penetrated potential of the car market, all pointing to robust long-term growth.