Brazilian light-vehicle (LV) sales increased 13.7% year on year (y/y) in June, following a strong May, and rose 4.3% y/y over the first six months of 2017. With Brazil's LV sales and exports (up 40.7% y/y) growing in June, production continues to improve.
IHS Markit perspective
- Significance: In June, the Brazilian light-vehicle (LV) sales grew 13.7% y/y to 189,483 units. In the month, exports were up dramatically by 40.7% on increased efforts, assisting improvements in production. In the year to date (YTD), the market was in positive y/y growth territory for the first time since 2014. In the YTD, LV sales were up 4.3% y/y, exports were up 58.6%, and production increased 23.7%.
- Implications: After three years of significant declines, on the absence of economic momentum and consumer confidence and banks' caution towards lending, the Brazilian market appears to be stabilising. Additionally, following the seven interest rate cuts since November 2016 it may be that the reduced rates are beginning to assist auto sales. New uncertainty has emerged in June, however, as Brazilian president Michel Temer has been formally charged with corruption.
- Outlook: Brazil's automotive market continued its positive movement in June, was ahead of the last-year period through the first six months of 2017, and could show a full-year improvement in sales for the first time in several years. The release of funds into the FGTS social welfare programme has, as expected, contributed to market stabilisation. The programme runs through August and may cause the fourth quarter to see some pull-ahead effects. In our June forecast, IHS Markit projects Brazil's LV sales will increase by 1.8% to 2.02 million units in full-year 2017.
Light-vehicle (LV) sales slumped nearly 20% in the Brazilian market in 2016, marking two full years of sales declines and posting the lowest sales pace since 2006, according to the National Association of Motor Vehicle Manufacturers (Associação Nacional dos Fabricantes de Veículos Automotores: Anfavea). However, over the first six months of 2017, the results are a bit more optimistic. March saw the first year-on-year (y/y) gain in the Brazilian market in over two years, which has been repeated in May and again in June. May's Brazilian LV sales grew 17.3% y/y, and June continued the double-digit rate gains, although the month returned a demand improvement of 13.7% y/y. Compared with May, June's LV sales were essentially flat, falling 0.5%. Compared against the first six months of 2016, sales were up 4.3% in the first half of 2017. In addition, dramatic increases in exports continue to support production improvements. Brazil's LV production was up by 14.8% y/y in June and was up 23.7% y/y in the year to date (YTD).
Following June's results, the president of Anfavea, Antonio Megale, reportedly said the association was increasing its full-year production forecast. Rather than an earlier estimate for production of 2.413 million units, the industry group expects Brazilian vehicle production to increase to 2.619 million units, according to media reports. Megale increased the production expectation based on increases in exports; Anfavea has retained its projection for full-year sales of 2.133 million units and forecasts exports of 705,000 units in 2017. Megale is quoted as saying that the improvements will reduce idle capacity in vehicle plants from 50% to 40%, as the production base looks to meet increasing home and export demand. The group did not update its sales projection, noting that sales in the first half were below its initial forecast for the year. Megale said that inflation control and falling interest rates were factors in the forecast, with the reduced Selic rate resulting in more available credit, encouraging banks to take more risks and lower consumer credit rates.
Although consumer confidence is down and difficult economic conditions include high unemployment and weak credit availability, inflation rates have been falling and interest rates have been lowered, with a 31 May reduction in the Selic rate pushing it down to 10.25%. In January, Megale reported Anfavea's projection was that in 2017 sales of cars, light trucks, trucks, and buses would improve 4% to 2.13 million units and that production would increase 11.9% to 2.41 million units. As noted, the projection has not yet changed.
Anfavea reported that light commercial vehicle (LCV) sales increased 4.7% y/y to 28,307 units and passenger car sales increased 15.5% y/y to 161,176 units in June. Fiat Chrysler Automobiles (FCA) lost its status as Brazil's top seller in January to General Motors (GM) and the two automakers have been trading places throughout the year. In June, FCA was ahead, selling 24,200 passenger cars and 10,742 LCVs compared with GM's 29,153 passenger cars and 4,455 LCVs. FCA is benefiting from the all-new Jeep Compass, which is produced in Brazil. Volkswagen (VW) remained in third place, with 18,021 passenger cars sold (up 7.3%) and 4,894 LCVs sold (up 18.0%). Renault-Nissan sold 18,831 passenger cars and 1,482 LCVs in June, ahead of Ford, which sold 16,439 passenger cars and 1,399 LCVs. Hyundai's passenger car sales were up 16.6% y/y to 15,698 units. Toyota's passenger car sales, including Lexus, grew 15.4% y/y to 13,289 units in June.
Brazil's LV exports were somewhat volatile last year, although generally showing positive growth in the final months of 2016. The figures have continued to gain strength in 2017, with June's exports up 40.7% against June 2016. Brazil lacked a strong export base to accommodate excess capacity, causing automakers to cut back on plant shifts and slow down production in a weak domestic sales environment in 2016. The efforts in 2016 helped address this within the South American region and have led to the improvements in 2017's exports. Brazilian LV production in June benefited from increased exports, with a 13.7% overall gain, although it is still below the levels of 2006. Passenger car production improved by 15.5% and LCV production increased by 4.7% during the month.
Outlook and implications
Brazil's automotive market continued its positive movement in June, was ahead of the last-year period through the first six months of 2017, and could show a full-year improvement in sales for the first time in several years. The release of funds into the FGTS social welfare programme has, as expected, contributed to stabilisation. The programme runs through August, and may cause the fourth quarter to see some pull-ahead effects. With our June forecast, IHS Markit projects light-vehicle sales will increase 1.8% to 2.02 million units in full-year 2017.
Guido Vildozo, IHS Markit senior manager of light-vehicle sales forecasting for the Americas, says, "As a result of the planned FGTS social welfare programme, which started in March and goes through August 2017, consumers held back purchases during the first two months of the year and came in strong after the government officially announced the release of the fund the second week of March. However, we anticipate a weaker than expected fourth-quarter given a push-forward affect the fund will have."
Along with fixing the fiscal deficit and tackling inflation, the country is affected by corruption scandals and a lack of political co-operation, but we do believe the economy is beginning to stabilise. However, official corruption charges have been brought against President Michel Temer. Vildozo says that if the situation impacts the modest recovery in consumer sentiment, we could see the market dip below 2.0 million units in the seasonally adjusted annual rate of sales until it is resolved.
Factors pushing the market declines in 2014, 2015, and 2016 include an absence of economic momentum and consumer confidence, continued cautious bank lending, and the discontinuation of tax benefits. Government investment was also frozen, as the government works to bring a growing deficit in check and to cope with the repercussions of alleged corruption at Petrobras, including the trial of former president Dilma Rousseff in May and June. Brazil faces several challenges on the economic front with a free-falling economy that looks like it will continue in 2017. President Temer's government visualises deficits through 2018, which will not benefit the country's credibility. Increasing vehicle prices (up 15.8% on mandated safety equipment and the INOVAR mandate pushing more fuel-efficient technologies), high inflation, high interest rates (at 26% in October 2015 and holding through January 2017, compared with a record low of 15% in second quarter of 2013), and tight credit availability have been driving sales down since 2014 and these factors grew more severe in 2015 and 2016. They persist in 2017, although there may be some relief in the falling Selic interest rate.
Media reports citing the Brazilian Institute of Geographic Statics that inflation ended 2016 at 6.29%, compared with 10.36% in February 2016, below the central bank's target ceiling of 6.5%. In April 2017, IHS Markit estimated the rate fell to 4.1%. With the falling inflation, the government has eased the Selic interest rate. In a series of six cuts between July 2015 and May 2017, the rate was decreased from 14.25% to 10.25%.
Looking further ahead, Brazil is in for a long recovery. With little change in the economic situation forecast, there are no drivers of LV sales growth in the next few years. As a result, LV demand will not break 2.5 million units until 2021. After that IHS Markit expects a stronger recovery. The potential for Brazil is there, but achieving it will be a complicated process given the country's ongoing political uncertainty.
Brazilian opportunities include a low motorisation rate (a little more than five people per car). The nominal USD10,000 GDP-per-capita milestone was broken in 2010 – this is the point at which a significant portion of the population may be in the right position to be new-car buyers. Brazil is now closer to a per-capita GDP of just USD8,000, however. Another factor is a broader spectrum of available vehicles, as automakers have expanded over the past five years.
This combination of elements puts the forecast for the Brazilian market at close to 3 million units by the end of the forecast horizon. IHS Markit's outlook puts Brazil's motorisation rate at roughly 4.0 people per car within five years and working towards 3.5 people per car in 10 years. This helps to explain why Brazil has become such a critical pillar of growth for OEMs worldwide.
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