Industry Trend Analysis - Consumer Still At Heart Of Sales Strength - FEB 2018

BMI View: Chilean passenger car s ales growth will remain high in 2018 thanks in part to an attractive mix of macroeconomic factors, namely: rising household incomes and employment , low interest rates and an appreciation in the Chilean peso .

We believe Chile's passenger car market is set for outperformance in 2018 thanks to the country's very healthy consumer profile and the current strength of the Chilean peso. Breaking our 2018 Chilean vehicle sales forecast down, we believe passenger vehicles will outperform other segments, growing at 8.9% compared to the 6.7% expansion in commercial vehicles (CVs). Over the full forecast period from 2018 to 2021, passenger vehicle and commercial vehicle sales will both expand by an annual average of 4.9%, reaching 319,807 units and 125,046 units respectively in 2021.

Passenger Cars Leading Chilean Upswing
Chile - Vehicle Sales Forecasts By Segment, Units
e/f = BMI estimate/forecast. Source: ANAC, BMI

The Consumer ' Sweet Spot '

We stress that Chile's new car market is currently benefiting from consumers being positioned in a macroeconomic 'sweet spot' that is well-suited for supporting spending on new cars. This is thanks to the country's current situation of rising employment and real wages combined with low interest rates, which is spurring a boom in private consumption. To put this in context, our Country Risk team has forecast Chile's real GDP growth to reach 2.6% in 2018, with the private consumption component of GDP contributing greatly to this growth by expanding 3.3% in 2018.

Lower Borrowing Costs Will Support Sales
Average Interest Rates On Consumer Loans, %
Source: Banco Central De Chile, BMI

A major contributing factor to this rise in private consumption - including the rise in vehicle purchases - is the rise in borrowing-fuelled consumption. Here, consumers are currently benefiting from historically low lending rates (including autos loan rates) ( see chart above). This is spurring consumer borrowing upwards at a fast pace, with total consumer loans having averaged growth of 8.3% y-o-y in the first eight months of 2017 ( see chart below) compared to only 4.9% y-o-y average growth in commercial loans to non-financial businesses over the same period.

Consumer Borrowing Reaching All-Time Highs
Chile - Conumer Loans, CLP bn & % chg y-o-y
Source: BCC, BMI

At the same time, consumers are also enjoying a combination of both rising real wages and employment, which will further spur spending, particularly on new vehicles. As can be seen in the chart below, real earnings of Chilean consumers have been growing strongly in recent months, climbing 2.6% y-o-y in June 2017 thanks to a rise in earnings and a benign rate of inflation. At the same time, total employment has reached an all-time high of 8.26mn people in the three months to August 2017, with the pace in jobs growth also accelerating ( see chart below). With more consumers finding employment and average incomes rising, the overall purchasing power of Chile's consumer base is rising and this should spur further growth in spending. It is also likely to be helping spur the growth in consumer loans as rising incomes and job security boost consumer confidence and willingness to borrow.

Real Wage And Employment Boom: A Recipe For Spending
Real Hourly Wage Growth & Employment Growth, % chg y-o-y
Source: BCC, BMI

Exchange Rate Movements Look Beneficial

Finally, we highlight that the forecast strength of the Chilean peso against the US dollar will help keep a lid on car price inflation and may also spur a rise in discounting by local dealers. Though the Chilean peso has already appreciated from its 2016 levels, our Country Risk team forecasts further appreciation over the remainder of 2018 ( see ' CLP: Gradual Appreciation Likely In 2018 ' , September 28). This bodes well for the prices of vehicles in Chile given that it has no mass market domestic vehicle production; the vast majority of its new vehicles are imported and their prices are therefore highly susceptible to swings in exchange rates. Dealers may also be encouraged to raise discounts and the attractiveness of their financing deals knowing that the costs of restocking imported models will be cheaper now than in 2016.

Recent CLP Strength To Keep Vehicle Prices Low
Exchange Rate, CLP/USD (daily)
Source: Bloomberg