Fitch Solutions believes that Pakistan’s automotive sector will start to struggle in (FY) 2018/19 and FY2019/20.
The research report stated that risks relating to over-reliance of Pakistan’s automotive sector on Chinese investment have come to fruition.
The government’s latest decision to remove vehicle purchasing restrictions on non-income tax-filers will provide some support and stem some of the pressures coming from the slowdown in investment inflows.
The Pakistani government has issued an amended Finance Supplementary Bill in January, which allowed for removal of vehicle purchasing restrictions on non-income tax-filers.
Therefore Fitch Solutions 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.
However, the 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.
Fitch believes that this slowdown in investment inflows into Pakistan will have a detrimental impact on the country’s commercial vehicles segment, especially its heavy commercial vehicles.
The research agency forecasted that total commercial vehicle sales are expected to grow by only 4.9% in FY2019, with light commercial vehicle sales likely to expand by 11.8%.
The heavy commercial vehicle sales, which will bear the brunt of the investment slowdown, are expected to contract by 18.1% over the same period.
Fitch further highlighted that some of this deteriorating sales outlook stems from a market correction as sales experienced a spike in FY2017/18
Furthermore, Fitch also highlighted that 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 limiting growth somewhat 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 are poor and unable to afford new vehicles.
Therefore Fitch stated that the new passenger vehicle sales are expected to contract by 3.6% in FY2019, and remain stable in FY2020, growing only 0.6%.
Nonfilers being allowed to buy cars is tantamount to aiding tax thieves.