March 11, 2019 (MLN): As the risks relating to over-reliance of Pakistan's automotive sector on Chinese investment have come to fruition, the sector will start to struggle in FY18-19 and FY19-20, says a report by Fitch Solutions.
Recently, the government issued amended Finance Supplementary Bill, which allowed for removal of vehicle purchasing restrictions on non-income tax-filers. This policy, as per the report, will provide some respite and curtail some of the pressures coming from the slowdown in investment inflows. Therefore, Fitch has revised down its forecast for new vehicle sales in FY2018/19 and FY2019/20 to a 2.4% contraction and 1.3% growth respectively, down from 7.3% and 10.6% growth forecasted previously.
Foreign investment into Pakistan, of which around 30% comes from China, has decreased by 74 .8% YoY over the first seven months of FY2019. Chinese investment in Pakistan, primarily as part of the China Pakistan Economic Corridor, has slowed by 28.4% YoY. This slowdown in investment inflows into Pakistan will have a detrimental impact on the country's commercial vehicles segment, especially its heavy commercial vehicle segment, the report further suggested.
The total commercial vehicle sales is expected to grow by only 4.9% in FY2019. Moreover, light commercial vehicle sales are expected to remain relatively unscathed and expand by 11.8%, while heavy commercial vehicle sales, which will bear the brunt of the investment slowdown, are expected to contract by 18.1% over the same period.
As per the report, the government’s decision to remove the vehicle purchasing restrictions of non-income tax-filing consumers will prop up passenger vehicle sales as the slowdown in investment exerts a drag on consumers' willingness to make larger purchases, such as new cars.
Previously non-filers of income tax were prohibited from purchasing new vehicles, which pushed the poorer consumer base out of the market, thereby somewhat limiting growth in Pakistan's new passenger vehicles sales. That said, this change in government policy will only offer marginal support to the demand for passenger vehicle sales as the majority of the non-income tax paying consumers remain poor and unable to afford new vehicles.
Thus, the sales of new passenger vehicle are expected to contract by 3.6% in FY2019, and remain stable in FY2020, growing only 0.6%.
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