The vehicle market, and the overall economy, slows as political crisis hits confidence

The recovery in the Philippine vehicle market that had been taking place throughout most of 2000 came to an abrupt halt in the fourth quarter of the year, as the deepening political crisis continued to depress business and consumer confidence. Economic growth is expected to have dropped sharply in the final months of 2000, and we expect that significant damage to the economy has already been done. Public sector debt is on the rise, and tax revenues and privatisation proceeds have come in well short of expectations. The 2001 budget has been cut as a result of the much higher than expected budget deficit in 2000. The peso hit record lows last week, and the recent rally was speculative, and likely to have been short-lived. Slowing global economic growth, and particularly in the USA, will also affect Philippine exports and this will add to the domestic malaise.

Early end to the crisis with Estrada's resignation, but uncertainty still lies ahead

President Estrada lost support of cabinet ministers

The withdrawal of support for Mr Estrada from cabinet ministers and the military comes as a welcome relief for investors, business leaders and we suspect the majority of the Philippine population. The recent twists in the trial of President Estrada brought popular sentiment to a dangerously low ebb this week, and social unrest has paralysed business activity for much of January. Mr Estrada's resignation means that the political crisis will come to an end sooner rather than later, and now the task of reversing the damage to the economy can soon restart. Substantial political uncertainty still lies ahead, however, and confidence in the system will have to be restored before we can see a significant renewal in foreign and domestic investment interest. GDP growth is now expected to be around 3% or lower in 2001, compared with earlier forecasts of 4.5-5.0%.

But fragile economic recovery has already been compromised, and vehicle market recovery has been set back a year

MotorBusiness-Asia has revised down it forecasts for the Philippine vehicle market, with the political crisis expected to have already set back the market by at least a year. New passenger car sales are expected to remain depressed - at the decade lows recorded in the previous three years and at around a third of the peak 1996 levels. Commercial vehicle sales proved to more resilient in the fourth quarter of 2000, due to strengthening rural demand after strong agricultural output growth earlier in the year. But with the agricultural sector having been affected by typhoons in recent months, we expect significant short-term weakness from January. For the year, we are forecasting commercial vehicle sales to decline by 15% this year. Overall vehicle sales volumes are forecast to decline in the first half of 2001, with demand picking up moderately into the second half of the year.

Philippine new vehicle sales and forecasts by type, 1995-05

  1995 1996 1997 1998 1999 2000 2001* 2002* 2003* 2004* 2005*
Passenger cars 71,195 88,977 75,139 34,494 27,263 28,826 29,556 35,317 40,210 44,000 47,000
Commercial vehicles 55,967 73,118 68,675 45,543 46,834 55,143 46,775 51,780 56,505 60,000 64,000
Total vehicles 127,162 162,095 143,814 80,037 74,097 77,905 76,331 87,097 96,715 104,000 111,000

Sources: CAMPI; *MB-A forecasts

There will be little to stimulate demand in the short term

Honda Civic

Important new model launches this year, including the Honda Civic and Toyota Corolla - the country's two best selling car models, will help revive buying interest once some of the uncertainty is worked through. But overall, we do not expect to see annualised growth in vehicle sales until 2002. With little left to stimulate economic growth, we expect the new vehicle market to show only a moderate growth beyond 2001, driven primarily by replacement demand. This, we expect, will increase from 2003 and growth in sales volumes will accelerate. But real average incomes have declined, and will take time to restore. The economy will struggle to generate new buyers for the vehicle market over the next two years.

Toyota Corolla

Automotive industry faces difficult times ahead

The automotive industry also faces more structural difficulties. It has among the lowest economies of scale among the main automotive producing nations in the ASEAN trade block, and regional tariffs are set to fall further in 2003, from 20% this year. Already, some of the smaller vehicle assemblers have ceased production, and others may follow as imports become more competitive. There is also a growing threat of imports from China. Unlike its main ASEAN competitors, the Philippine vehicle industry does not export cars or trucks. The political crisis, and its effects on the economy and domestic vehicle demand, could not have come at a worst time for the industry.

 

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