Mexico Auto Sector: Strong Outlook

Experts perdict Mexican auto sales will grow between 6 and 10 percent this year, setting a new record. (Photo: Mexican Economy Ministry)

Despite a slowdown from last year, Mexico’s auto sales are setting new records.

Inter-American Dialogue

Mexico’s auto industry posted records in domestic sales, production and exports last year, according to industry trade groups. Easier credit, dealer promotions and demand, driven by higher employment and low levels of inflation, fueled Mexican auto sales, The Wall Street Journal reported in January. What is the outlook for Mexico’s auto sales this year and next? What factors will most affect the sector’s performance in the months ahead? What trends are driving consumer purchase decisions and financing for autos in Mexico?

Myriam Rubalcava, senior economist at Banamex: Last year was characterized by the extraordinary performance of the Mexican consumer. The auto sector was among the main beneficiaries as it surprised with double-digit growth in sales. In addition to the positive drivers of consumption, there was another factor that boosted auto sales to unprecedented levels: the enforcement of the ban on used imported cars, which brought such imports down by 60 percent year-over-year in 2015. Moreover, one of the previous obstacles to growth was the lack of credit for auto purchases, but last year saw a turnaround to above 23 percent growth. Auto sales in Mexico this and next year are expected to keep growing at more moderate rates. Fundamental factors will remain supportive of growth, but the trend is likely to weaken as GDP growth declines in 2016 (2.1 percent from 2.5 percent in 2015). Inflation is expected to remain contained, but auto prices may finally adjust to reflect the peso’s depreciation. In addition, the effect from the ban on used imported cars will remain visible in the next year or so, but will fade gradually. Moreover, slightly higher interest rates this year will also favor a mild slowdown in the rate of credit growth. As a tailwind, we see the new environmental policy in Mexico City, although new purchases could be split between new and used cars. Thus, we see auto sales slowing down from record growth levels in 2015 (19 percent) to 8 percent this year and as the economy recovers in 2017, auto sales will increase 10 percent.

Bill Rinna, senior manager for North American forecasts at LMC Automotive: We are projecting light vehicle sales in Mexico to grow 6.4 percent to a record 1.43 million units this year and by 3.2 percent to 1.48 million units next year. Through the first quarter, sales have been strong, with overall volume up 13.6 percent. Our forecast for the year, however, remains cautious given that the economy is far from robust. We expect GDP growth to be somewhat sluggish and on par with last year, and following an interest rate hike last December, the central bank raised rates again in February, putting pressure on vehicle sales. While still low, inflation has started to rise, and exports of goods through February have continued to fall, led by lower oil exports, which we expect will negatively affect job and income growth. However, given the negative pressures, we project overall sales will be boosted by the weak peso, which has raised the peso values for remittance inflows in U.S. dollars. Low interest rates, although they are now rising, along with still-low inflation will help drive demand for the year. The Mexican government’s tightening of the restrictions on used vehicle imports from the United States in 2014 will also continue to be a positive for new vehicle sales. Like the rest of region, consumers will be drawn to SUVs with their sales forecast to outpace the market this year and up over 10 percent year-over-year.

Guido Vildozo, manager for Latin America light vehicle sales at IHS Automotive: Mexican light vehicle demand has been soaring since March of last year. There are several elements driving momentum, with credit availability growing and accounting for 62 percent of light vehicle sales last year. More important is the fact that Brazil and Argentina stated their intention to extend the trade quotas or walk away from existing free-trade agreements with Mexico for the automotive industry. There is roughly 10 percent of the expected plant capacity to be installed in Mexico by 2020 that was geared for export to Mercosur, a bit more than half a million units. Faced with quotas that restricted exports to Mercosur at 200,000, the Mexican government took the logical step of restricting used car imports into the country and thus boosted local demand to accommodate some of the vehicles initially geared for Mercosur. The government was successful in boosting momentum by 20 percent to 1.35 million units in 2015, and we anticipate an expansion of 8-10 percent in 2016 before demand tapers into the single low digits after that.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

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