Industry Trend Analysis - Reforms and Currency Key To 2017 Sales Recovery - APR 2017

BMI View: After four years of consecutive declines, Peru's new vehicle market will expand 5.6% in 2017. The increase will be spurred by a general uptick in economic activity as well as lower taxes and high levels of pent-up demand.

Peru's positive economic growth outlook, coupled with a strengthening sol, lower taxes and high levels of pent-up demand within the local market, all inform our optimistic stance towards new vehicle sales in 2017. We are forecasting a 5.6% rise in new vehicle sales for the year, to around the 180,000 unit mark. We expect light vehicle (+6%) sales to significantly outperform heavy commercial vehicle (+1.2%) sales.

2017 A Year For Recovery
Peru - Vehicle Sales By Segment, Units & % chg y-o-y
f = BMI forecast. Source: AAP/BMI

First, our Country Risk team is becoming much more optimistic on the outlook for the Peruvian economy. We are targeting GDP growth of 4.2% over the next two years, on the back of pro-business reforms and negotiations with a number of countries on free trade agreements. In this latter context, we are of the opinion that the January 2017 decision by new US President Donald Trump to withdraw from (and effectively scuttle) the Trans-Pacific Partnership (TPP) trade deal will only be a small blow to the Peruvian economy over the coming two years. All told, we expect Peru to continue to be the fastest growing major economy in Latin America in 2017, underpinned by robust growth in the country's extractive sector, strong infrastructure investment and rising private consumption ( see ' Construction Delays Only A Modest Setback For GDP Growth ' , February 1 2017).

Second, we believe that a series of fiscal reforms to be enacted over the coming years will boost the disposable income of many Peruvians, enabling them to make a new car purchase after many years of austerity. In this regard, the government is looking to press ahead with cuts to VAT and corporate taxes, alongside reductions in red tape for small businesses ( see ' Falling Popularity Not Enough To Derail Kuczynski's Reforms ' , January 31 2017). Both of these measures should benefit demand for both passenger cars and light commercial vehicles allowing them to rise alongside the backdrop of rising private consumption, which will expand by 4.5% in 2017, up from 3.1% in 2016.

Finally, we believe that a strengthening Peruvian sol will bode well for the country's import-reliant new vehicle market by helping to ease vehicle import costs. Our Country Risk team forecasts the sol to average PEN3.30/USD in 2017, up from PEN3.37/USD in 2016, representing an average appreciation of 2.2% over the year ( see ' PEN Rally To Settle Into Gradual Uptrend ' , January 23 2017). With the majority of Peru's vehicle imports coming from the US - 21.5% in 2015- we believe a positive outlook for the nation's currency will be a boon for the new vehicle market.