Industry Trend Analysis - MENA Autos: From Safe Haven To Underperformer - NOV 2017


BMI View: The Middle East and North Africa region will now be the worst performing region globally in terms of vehicle sales growth in 2017, after downward revisions to forecasts in key markets. Ongoing weakness in the GCC states has been compounded by policy disruption in Algeria which will weigh on the outlook for the region as a whole.

The Middle East and North Africa (MENA) region, and the GCC states more particularly, have gone from being a safe haven for carmakers in years gone by with sustained sales growth, to the worst performing region globally in 2017 according to our vehicle sales forecasts. While Iran and Morocco provide some cause for optimism with positive growth forecasts for 2017, the rest of the region is very much a story of a contracting market.

MENA Lagging Global Sales Growth
Global Vehicle Sales Growth By Region
BMI calculation

By segment, we still expect commercial vehicles (CV) to perform worst as governments cut back on the construction projects that we had expected to generate demand for these vehicles. We forecast CV sales to decline 12.0% compared with a 3.4% drop in passenger car sales. Some of the biggest CV declines are forecast for GCC states, such as Oman (-34.8%) and Saudi Arabia (-43.8%), reflecting the impact of cutbacks in oil producing states

Weakness Lingers In GCC Markets

Despite already holding a downbeat view of the GCC markets we have made some further downward revisions. One of the most notable is Oman, where total vehicle sales were down 24.1% y-o-y in the first half of the year against a weak economic backdrop. We now forecast a 25.0% fall in new vehicle sales over the full year, with CV sales (-35.0%) to underperform passenger cars (-20.0%).

In July 2017, our Country Risk team downgraded Oman's GDP growth forecast to 1.2% (from 2.0% previously). This very subdued level of economic activity indicates that local businesses will continue to scale back on spending in areas such as fleet renewal over the near term, thereby reducing demand for CVs. We also believe that still-low oil prices will continue to have a negative impact on both consumer and business confidence, with any efforts by the government to reform subsidies or other elements of Oman's welfare system again set to undermine household purchasing power.

Reflective Of GCC Struggles
Vehicle Sales, units
National Sources/BMI

In Qatar, a severe downward revision is the result of diplomatic tensions between the country and the rest of the GCC. Overall, we believe that the Gulf diplomatic crisis - and resultant restrictions on cross-border movements of goods and people between Qatar and Saudi Arabia, the UAE, Bahrain and Egypt - will weigh on consumer and investor confidence in Qatar over the coming months, while also directly disrupting activity in certain non-hydrocarbon sectors. As such, we believe that there will be double-digit declines in sales for both passenger cars and CVs in 2017.

Some non-hydrocarbon sectors will also be directly impacted by the shutting of borders, including tourism (around 40% of all tourist arrivals into Qatar originate from the Arab Gulf) and aviation, which are both set to experience a slowdown in activity. This lack of inbound tourism demand will weigh on the near-term outlook for cars and SUVs used by rental car companies and partly informs our view that the passenger car segment (-18.0%) will underperform the CV segment (-15.0%) over the remainder of 2017. The other major reason behind CV outperformance is that Qatar maintains a significant pipeline of infrastructure projects. We expect the Qatari government to make efforts to ensure infrastructure projects linked to the 2022 FIFA World Cup and the national diversification programme progress without substantial delay.

Iraq Recovery Provides Glimmer Of Hope

The destruction of the new vehicle market in Iraq between 2013 and 2015, with the biggest decline of 49.0% coming in 2015, has provided a low base for growth, but offers a welcome bright spot for the MENA region. We forecast total vehicle sales in the country to grow 5.6% in 2017 largely due to low base effects, but growth will gather steam in 2018 and 2019 with average growth of 7.0%.

Although low base effects are set to play a key role in the recovery of vehicle sales in 2017, the recovery in private consumption levels as the security situation in the country improves will support our vehicle sales forecasts over 2017-2021. Our Country Risk team forecasts private consumption to grow 3.0% in 2017, up from a 3.0% contraction in 2016. The recovery in private consumption will continue to 2021 with a forecast annual average growth rate of 3.7% over our 2017-2021 forecast period.

Large Potential For Market Recovery In The Long Run
Total Vehicle Sales (Units & % chg y-o-y)
e/f = BMI estimate/forecast. Source: Renault, BMI

In terms of vehicle segments, an improving security situation will be positive for infrastructure in terms of moving along planned projects, while it will also foster an increase in FDI. We expect these factors to be most supportive of the CV segment, as business confidence gradually improves. According to our key projects database, there is over USD90bn worth of projects currently announced, at planning stage or in the tender process.

Policy Uncertainty Dampens Algerian Outlook

While we have previously seen North Africa as a positive story in the MENA region, a downward revision to our forecast for Algeria's vehicle sales on the back of changes to industry policy have weighed on the overall outlook. The recent decision of the new Algerian government to put a moratorium on new production plants will increase uncertainty around new vehicle sales, as the government rethinks the national automotive policy.

A drastic reduction in import quotas, coupled with a crackdown on new plants to produce models domestically, means stocks of available vehicles will be reduced. The move comes as the authorities claim that the production policy followed by the former Sellal government which left office in May 2017 - that of encouraging foreign carmakers to set up local semi-knocked down kit assembly facilities by cutting vehicle import quotas - has arguably failed in some cases. As such, given the lack of stock for consumers to buy, we have revised down our forecast for vehicle sales to a contraction of 35.0% in 2017.

Pushing For Self-Sufficiency
Algeria Vehicle Imports (CBUs)
Local press

An August 2017 report by La Tribune Afrique stated that 2017 import licences for a total of just 25,000 vehicles would be issued to some 40 dealerships by the end of August. This figure is just over a quarter of the 98,374 vehicles imported into Algeria in 2016 and just 4% of the 605,000 vehicles that were imported into Algeria in 2012, the year when the market hit an all-time sales high. The same report stated that official dealerships have not been able to import a single vehicle into Algeria for the year so far. When combined with the ongoing weakness in the Egyptian market, this downturn in Algeria has contributed to a shift in our aggregate sales forecast for North Africa to a decline of 13.9% in 2017.