Brazilian light-vehicle sales were strong in May, increasing 17.3% year on year (y/y), after a pullback in April's demand. Exports continued to increase, rising 52.2% y/y, which helped drive an increase in production of 33.5% y/y.
IHS Markit perspective:
- Significance: In May, the Brazilian light-vehicle sales grew by 17.3% y/y, bringing year-to-date (YTD) sales up by 2.3% y/y. For the month, exports were up dramatically on increased efforts from the industry, assisting strong improvements in production output. In YTD figures, the market is in positive y/y territory for the first time since 2014, while exports rose 63.7% y/y and production increased 23.9%.
- Implications: After three years of significant decline, on the absence of economic momentum and consumer confidence and the banks' caution towards lending, the Brazilian market appears to be stabilising. Additionally, there have been six interest rate cuts since November 2016 and it may be that the reduced rates are beginning to assist auto sales
- Outlook: Brazil's automotive market returned to positive movement in May, after a contraction in April, and it has shown an improvement in sales on a YTD basis for the first time in several years. The release of funds into the FGTS social welfare programme is, as expected, contributing to market stabilisation. The programme runs through August. IHS Markit projects sales for the full year 2017 will be essentially even with 2016's; after three years of decline, such a result is a step forward.
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 five months of 2017, the LV sales results offer more optimism, rising up 2.3% year on year (y/y). In March, LV sales saw the first y/y gain in over two years, which has been repeated again in May. In May, LV sales grew 17.3% y/y and 24.7% month on month (m/m). Additionally, dramatic increases in exports continue to support production improvements. LV production was up by 33.5% y/y in May and was up 23.9% y/y in the year to date (YTD).
However, on May's results, the president of Anfavea, Antonio Megale, reportedly highlighted that the month had more working days than in April. Megale also reportedly said that, while production was up, auto plants were still underutilized, with passenger car plants running at 50% capacity and heavy truck plants at 20%. Anfavea also states that the improvements in production have allowed the employment level in the industry to stop falling, although it remains lower than the level of a year ago. Megale does point to the fall in inflation and decline in interest rates as contributors to improved the sales. The association indicates that it expects to increase its forecasts for exports and production in 2017, although it will do so after the ongoing trial of former Brazilian president Dilma Rousseff.
Although consumer confidence is down and the country's 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 to 10.25%. In January, Megale reported Anfavea's projection that in 2017 sales of cars, light trucks, trucks, and buses will improve 4% to 2.13 million units and that production will increase 11.9% to 2.41 million units. That projection has not yet been changed, but, as noted, it is expected to be.
Anfavea reports that light commercial vehicle (LCV) sales increased 8.8% y/y in May and passenger car sales increased 18.8% y/y. Passenger car sales reached 163,297 units and LCV sales were 27,093 units. 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 so far this year. In May, FCA sold 23,084 passenger cars and 10,312 LCVs, compared with GM's 30,262 passenger cars and 3,380 LCVs. In the YTD, FCA was ahead by about 11,600 units, as the company benefits from an all-new Jeep Compass, produced in Brazil. Volkswagen (VW) remained in third place, with 19,443 passenger cars sold (up 12.8%) and 4,947 LCVs sold (up 22.0%). Renault-Nissan sold 18,620 passenger cars and 1,836 LCVs in May, ahead of Ford with sales of 17,460 passenger cars and 1,272 LCVs. Hyundai's passenger car sales were up 17.1% to 15,517 units. Toyota's passenger car sales, including those of the Lexus brand, grew 15.4% to 13,417 units in May.
LV exports were somewhat volatile in 2016, although showing generally positive growth in the final months of the year. The figures have continued to gain strength in 2017, with May's exports up 52.2% y/y. Brazil lacked a strong export base to accommodate excess capacity, causing automakers to cut back on shifts and slow down production in a weak domestic sales environment in 2016. Efforts in 2016 to help address this within the South American region have led to the improvements in 2017's exports. Production in May benefited from increased exports, showing a 33.5% overall gain, although it is still below the levels of 2006. Passenger car production improved by 35.3% y/y in May and LCV production increased by 20.7% y/y.
Outlook and implications
Brazil's automotive market returned to positive growth in May, after a contraction in April, and the market shows an improvement in sales on a YTD basis for the first time in several years. The release of funds into the FGTS social welfare programme is, as expected, contributing to the stabilisation. The programme runs through August. Additionally, interest rates have been cut again. IHS Markit projects the full year 2017b will see sales essentially even with 2016's; after three years of decline, this result will be a step forward.
Guido Vildozo, IHS Markit senior manager of LV sales forecasting for the Americas, says, "As a result of the planned FGTS social welfare programme, which started in March 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 in the second week of March. The release of the funds is taking place between now and the end of August, which we believe will boost sales during that period. However, we anticipate a weaker than expected fourth-quarter given the push-forward effect the fund will have in vehicle sales."
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. IHS Markit expects growth in the auto market in 2017 to be followed by only slow gains through 2019. The seasonally adjusted annual rate (SAAR) of sales dropped to 2 million units in the final quarter of 2016 and stayed there in the first two months of 2017. The SAAR also reached 2.07 million units in April.
Factors pushing the recent period of decline include an absence of economic momentum and consumer confidence, continued cautious bank lending, and the discontinuation of tax benefits. Government investment has also been frozen, as it works to bring a growing deficit in check and to cope with 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 extend into 2017, thus we caution clients not to get overly optimistic given recent political stability," says Vildozo. President Michel Temer's government forecasts deficits through 2018, which will not benefit the country's credibility. Increasing vehicle prices (with 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 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 rate.
Media reports cite the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística: IBGE) that inflation ended 2016 at 6.29%, compared with October's 8.48% and 10.36% in February 2016, below the central bank's target ceiling of 6.5%. In April 2017, IHS Markit estimated the rate would fall to 4.1%. With the falling inflation rates, 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, LV sales are in for a long recovery. With little change in the economic situation forecast, there are no drivers for LV sales in the next few years. As a result, through 2020, LV sales will not break 2.5 million units. After that, IHS Markit expects a stronger recovery. The potential for the Brazilian market is there, but achieving it will be a complicated process given the country's ongoing political uncertainty.
Brazilian auto market 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 these over the past five years.
This combination of elements puts the forecast for the Brazilian LV 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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