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Economy
Friday, August 15, 2014 - 02:16
Plunging credit rating

South Africa’s new vehicle market continues to decline, with price increases and interest rate hikes causing consumers to look at used cars for better value.

These are the findings of the 26th edition of the WesBank Vehicle sales Confidence Indicator, presented by Cyril Zhungu, general manager of the motor division at WesBank.
Dealer confidence declined compared to the first quarter of 2014. “Post-recession growth saw the market reach all-time highs,” said Zhungu. “And so, while sales are declining, they’re still well above the levels seen between 2008 and 2010.”
Dealers still indicate a positive outlook for sales in the next three to six months. New model introductions and marketing incentives from manufacturers are driving this positive sentiment. However, activity could be negatively affected by the overall performance of the economy, as well as price inflation on new vehicles, which continues to be higher than the CPI target bands set by the South African Reserve Bank.
Manufacturers are trying to stimulate sales with innovative marketing, with refreshed model line-ups in a bid to entice consumers into bringing forward their vehicle replacement plans. However, efforts to grow sales are potentially being scuttled by a weakening rand. Imported vehicles, and locally-manufactured vehicles relying on imported components, will continue to see price increases as the currency is affected by the prevailing economic conditions, fuelled by labour unrest. This has seen a shift to the used car market where consumers are seeking better value for their money.
The introduction of credit amnesty legislation in March has significantly increased the potential customer base, which can be seen in the record number of applications received during the second quarter. “Household debt is still at high levels, and consumers do not have a lot of disposable income,” he says. “This will affect their ability to apply for credit, or require them to structure finance over longer periods to lower their monthly repayments.”
The current ratio of household debt to disposable income remains around 75% despite the generally lower historic interest rate levels. This suggests consumers are struggling to haul themselves out of debt.
Those clients who do qualify for further finance are resorting to balloon payments and maximum periods to reduce monthly repayments. The current average contract period is 68 months, while the number of consumers opting for balloon payments is also on the rise. These options are, however, being exhausted. Along with possible future interest rate hikes and increasing mobility costs consumers who have stretched their budgets will be in tricky territory.
“The new vehicle market is a good indicator of economic performance,” says Zhungu. “A healthy economy will have a strong new vehicle market, and vice versa.”
This is shown in 2014’s new vehicle sales, which saw a year-to-date decline of 5.3%, and the -0.6% negative growth of the country’s GDP for the first quarter. There is also an inverse correlation between rising interest rates and declining vehicle sales. January’s half-a-percent rise in the repo rate has already put pressure on new vehicle sales, and the recent further quarter percent will not help matters at all.
Investor sentiment and growing national debt are also placing South Africa’s credit ratings at risk, exacerbating concerns around the interest rate and rand’s performance.
Should the economy continue to perform poorly, as per the most recent GDP figures, buying confidence will naturally fall, in addition to the practical ability to buy, when it comes to affordability.
New vehicle prices will increase in line with the rand’s performance, further widening the price gap between new and used models. Consumers will turn to the used market for better value, or opt to delay their vehicle replacement. Consumers who have used maximum contract periods and balloon payments could also be prevented from replacing their vehicles until their deals break even.
 

Copyright © Insurance Times and Investments® Vol:27.8 1st August, 2014
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