September Brazilian light-vehicle sales grow by 25.0%, production and exports continue gains
In September, Brazilian light-vehicle sales recorded a notable jump, gaining 25.0% year on year (y/y), hence successively increasing growth in recent months. Over the first nine months of 2017, the light-vehicle market is up by 7.9%; with sales and exports (up by 58.0% y/y in September) growing, production was up by 39.4%.
IHS Markit perspective
- Significance: In September, sales in the Brazilian light-vehicle market grew by 25.0% year on year (y/y), reaching 193,806 units. Exports are up by 58.0% y/y on increased efforts to expand them, assisting improvements in production output, up by 39.4% for the month.
- Implications: After three years of significant decline, in the absence of economic momentum and consumer confidence, and the banks' caution towards lending, the market appears to be stabilising and holding growth. Additionally, with nine interest rate cuts since November 2016, it may be that the reduced rates are beginning to assist automotive sales. In August, Brazilian President Michel Temer avoided a trial concerning corruption allegations, avoiding another change in political leadership, although concern still remains.
- Outlook: Brazil's automotive market observed a y/y gain of 25.0% in September, an increased pace compared with August. The release of funds into the Guarantee Fund for Length of Service social welfare programme contributed to the stabilisation of the programme, which ended in August, although its sales strength continued into September. The programme may yet cause the fourth quarter to show some pull-ahead effects. With the September forecast, IHS Markit projects that the full year will experience an increase in light-vehicle sales of 6.9% to 2.13 million units.
Light-vehicle (LV) sales slumped by nearly 20% in the Brazilian market in 2016, marking two full years of sales declines and posting the lowest sales pace since 2006. However, according to the National Association of Motor Vehicle Manufacturers (Associação Nacional dos Fabricantes de Veículos Automotores: Anfavea), results for January through September are optimistic, with an increasing pace of monthly sales gains in August and September. In March the first year-on-year (y/y) gain in over two years occurred, which has been repeated from May through August. May's LV sales grew by 17.3% compared with May 2016. June's continued double-digit gains and returned demand improvement of 13.7%. in July, however, showed sales grow at a more modest 2.3%. September's y/y increase was the highest of the year, at 25.0%, which followed the welfare programme Guarantee Fund for Length of Service contributing to August's gain of 17.9%. Compared with the first nine months of 2016, sales are up by 7.9%. Along with some improvement to sales, dramatic increases in exports continue to support production improvements. Light-vehicle production was up by 39.4% y/y in September and is up by 30.4% year to date (YTD).
In September, the president of Anfavea, Antonio Megale, was cited as increasing the organisation's full-year production and sales forecast. Megale is reported to have increased the sales forecast from 4% to 7.3% (2.2 million units), production from 21.5% to 25.2% (2.7 million units), and exports from 35.6% to 43.3%. Megale said, "There are a number of good indicators that allowed us to review the prospects. Inflation and the Selic on declines and rising consumer confidence are signs that the economy has taken off from politics. The news coming from Brasilia every day no longer contaminates the economy." However, political issues continue to be a risk. Although President Michel Temer avoided prosecution in mid-2017, more charges were filed and his approval rating continued to decline in September.
Although consumer confidence is down and difficult economic conditions include high unemployment and weak credit availability, inflation and interest rates have declined, with a September reduction in the Selic rate to 8.25%. In January, according to Megale, Anfavea projected that in 2017 the sales of cars, light trucks, trucks, and buses will improve by 4% to 2.13 million units and that production will increase by 11.9% to 2.41 million units. Those projections have notably changed over the course of the year.Anfavea reported that September's light commercial vehicle (LCV) sales gained 6.5% and passenger car sales increased by 28.4%. Passenger car and LCV sales reached 168,021 units and 25,785 units, respectively. Fiat Chrysler Automobiles (FCA) lost its status as Brazil's top seller in January to General Motors (GM) and the two have been trading places throughout the year. In September, GM remains ahead, selling 30,988 passenger cars and 4,263 LCVs (up by 29.3% and 29.4%, respectively) compared with FCA's 22,708 passenger cars (up by 28.2%) and 9,747 LCVs (up by 9.9%). Volkswagen (VW) remained in third place, with 18,961 passenger cars sold (up by 114%) and 4,291 LCVs sold (up by 45.4%). Renault-Nissan sold 23,501 passenger cars and 1,206 LCVs in September, ahead of Ford. Ford sold 17,247 passenger cars and 1,537 LCVs. Hyundai's passenger car sales were up by 11.6%, to 14,791 units. Toyota's passenger car sales, including the Lexus, increased by 7.5% to 12,545 units in September.
Exports were volatile in 2016, although generally positive in the year's final months. The figures have continued to gain strength in 2017, with September exports up by 58.0% compared with September 2016. Brazil lacked a strong export base to accommodate excess capacity, causing automakers to cut back on shifts and slow down production in a weak domestic sales environment in 2016. Ongoing efforts are addressing this within the South American region and have led to improvements in 2017 exports. Production in September benefited from increased exports, with a 39.4% overall gain. Passenger car production improved by 44.3% and LCV production improved by 10.9% for the month.
Outlook and implications
Brazil's automotive market recorded a y/y gain of 25.0% in September, an increased pace compared with August. The release of funds into the Fundo de Garantia do Tempo de Serviço (FGTS) social welfare programme contributed to the stabilisation of the market. Although the programme ended in August, Brazilian sales strength continued into September. The programme may cause some pull-ahead effects in the fourth quarter. With the September forecast, IHS Markit projects that the full year will show an LV sales increase of 6.9% to 2.13 million units.
Along with fixing the fiscal deficit and tackling inflation, Brazil is affected by corruption scandals and a lack of political co-operation, but we observe that the economy is beginning to stabilise and has bottomed out. However, it is expected to be several quarters before an evident recovery. In June, official corruption charges were brought against Temer, but the president secured enough support from the Brazilian Congress to avoid a trial. However, Reuters reported in September that Temer's approval rating has dropped again as new charges were brought against him. With 92% of Brazilians expressing disapproval, he may still experience difficulty moving his agenda forward.
Factors pushing the declines in 2014, 2015, and 2016 include an absence of economic momentum and consumer confidence, continued cautious bank lending, and the discontinuation of tax benefits. Government investment was also frozen, to bring a growing deficit in check and to cope with the repercussions of alleged corruption at Petrobras, including the trial of former president Dilma Rousseff in May and June. Brazil faces several challenges on the economic front with a free-falling economy that appears to extend into 2017. Despite expectations that we are experiencing the worst, we caution clients not to be overly optimistic. The August and September results were affected by the closing of the FGTS programme and are likely to impact the fourth quarter. President Temer's government envisages deficits through 2018, which will not benefit the country's credibility. Increasing vehicle prices (expected to be about 16% on mandated safety equipment and the Inovar-Auto mandate pushing more fuel-efficient technologies), high inflation, high interest rates (23% in July 2017, compared with a record low of 15% in the second quarter of 2013), and tight credit availability began driving sales down in 2014 and these factors became more severe in 2015 and 2016. They persist in 2017, although there may be some relief in the falling Selic rate.
The media citing the Brazilian Institute of Geography and Statistics reported that inflation ended in 2016 at 6.29%, compared with 10.36% in February 2016, below the central bank's target ceiling of 6.5%. In August, Reuters reported that Brazilian inflation hit an 18-year low of 2.46% in the 12 months through August. In October, Brazil's planning minister was quoted as saying that inflation will be below 3% at end-2017. The central bank also cut the Selic rate again to 8.25% in September, in a series of nine cuts since July 2015. Brazil is in for a long recovery, with little change in the economic forecast as there are no drivers for LV sales in the next few years. As a result, LV demand will not break 3.0 million units until 2020. After that we expect a stronger recovery, with sales forecast to reach 3.4 million units in 2024.
Brazilian opportunities include a low motorisation rate (slightly more than five persons per car). The nominal USD10,000-GDP-per-capita milestone was broken in 2010 - this is the point at which most Brazilians may be new-car buyers. Brazil is now closer to a per capita GDP of just USD8,000, however. Another factor is a broader spectrum of available vehicles, as automakers have expanded over the past five years. Our outlook places Brazil's motorisation rate at roughly 4.0 persons per car within five years and working towards 3.5 people per car in 10 years. This helps to explain why Brazil has become such a critical pillar of growth for original equipment manufacturers worldwide.
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