Industry Trend Analysis - Vehicle Sales Recovery Underway But Fragile - JAN 2018

BMI View: Ukraine's vehicle sales segment will experience strong recovery in 2017 and 2018 ; however , its sales volumes will remain well below its historical highs. Furthermore , the growth that it will experience will be heavily exposed to both political and economic risks , making it very fragile.

For the first 10 months of 2017, Ukraine's vehicle sales increased by 31.8% y-o-y. Breaking this down, car sales increased 30.2% y-o-y for the same period and commercial vehicle (CV) sales increased 46.6% y-o-y. Although this is significant growth, the sales volume remains low and we do not expect the volume to recover to its past highs over our 2017-2021 forecast period ( see ' Duty Cuts No Real Relief For Sales ' , September 17).

We forecast vehicle sales to grow 36.9% in 2017 and 29.2% in 2018 and continue to average 15.5% over our 2017-2021 forecast period to reach a sales volume of 148,821 units by end-2021, remaining well below its 2008 high of 633,129 units. This robust growth will be fuelled by Ukraine's overall improving economy over our 2017-2021 forecast period; however, this recovery will be fragile and comes from a low base as it depends heavily on the continued improvements from manufacturing, agriculture and consumer sectors which will continue to face significant risks ( see ' Ukraine Steel Outlook To Remain Bleak Beyond 2017 ' , November 16).

Recovery Underway, But A Long Way Off
Ukraine - Vehicle Sales
f = BMI forecast. Source: Ukrautoprom, BMI

Commercial Vehicles To Lead Recovery Efforts

We believe that CV sales will lead Ukraine's automotive recovery efforts and will outperform passenger vehicle sales as we move into 2018. We believe that the demand for new CVs will remain strong from the key agricultural sector in particular; however, increased retail activity and a recovering manufacturing sector will provide strong support to the demand for CVs used for deliveries. Our Country Risk team highlights that agricultural exports in H117, which accounted for 42.1% of total goods exports, rose 28.5% y-o-y compared to a 3.3% expansion in H116 and expects household spending to increase by 5.9% in 2017 and 2.7% in 2018, thereby increasing the need for freight shipping and providing strong support for CVs.

CV Recovery In The Lead
Ukraine - Monthly Vehicle Sales
Source: Ukrautoprom

Moreover, we believe that the negative impact of the March 2017 trade blockade between Ukraine and the occupied territories in the Donbas is now starting to subside, which should see a resumption of demand for new CVs, especially heavy commercial vehicles, from the Freight Transport sector. Looking forwards, IMF-backed efforts to end a longstanding moratorium on land sales to foreign investors should lead to a substantial uptick in foreign direct investment into the country's agricultural sector, boosting productive capacity over the long term, although land reform now looks unlikely to be passed before end-2017 ( see ' Waning Reform Drive A Risk For Long-Term Development ' , October 06).

Fragile Growth Outlook For Both PVs And CVs
Ukraine - Vehicle Sales By Segment
f = BMI forecast. Source: Ukrautoprom, BMI

Wage Growth A Boon For PV Sales

We believe that passenger vehicle (PV) sales will generate strong growth in 2017, albeit to a lower extent than CV sales growth, by gaining support from increased consumer spending power as real wages continue to grow. A doubling in Ukraine's monthly minimum wage, from UAH1,600 to UAH3,200, which came into effect on January 1 2017, should boost local purchasing power and lead to continued growth in private consumption levels across 2017 and 2018. Our Country Risk team forecasts private final consumption to grow 1.6% in 2017 and 2018, providing robust support to PV sales as Ukraine's macroeconomic headwinds ease.

Moreover, our Country Risk team believes that a strong disinflation and the stabilisation of the hryvnia indicate that the National bank of Ukraine (NBU) will be able to continue its policy of monetary easing, which will facilitate a gradual loosening of credit conditions, improving private and corporate access to credit. Looking forwards, we are targeting a further 1% cut in the policy rate across 2018, taking it down to 11.5%. This should feed into more attractive loan rates for those Ukrainian consumers dependent on financing to fund a new vehicle purchase.