The economies in the Middle East are coping with the impact of lower oil prices and the resulting austerity measures. While these factors are impacting the fleet market in the Middle East, it is difficult to quantify the impact across the entire region. “It is difficult to gauge the size of the total fleet market in the Middle East since vehicle registration data is not available in the Middle East,” said Seyar Shunnar, regional manager – Fleet & CPOV for General Motors, who is based in Dubai.
This report will examine, on a country-by-country basis, the state of the fleet markets in Egypt, Jordan, Bahrain, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates.
Egypt Fleet Market Conditions
In November 2016, the Central Bank of Egypt embarked on a major economic reform program that included lifting restrictions on foreign exchange transfers, which depreciated the Egyptian pound.
By letting the foreign exchange rate for the Egyptian pound to float, it caused its value to decrease, resulting in substantial price increases throughout the economy.
The argument favoring the liberalization of the exchange rate was to increase the competitiveness of the Egyptian economy and boost private sector economic activity, which had been severely impeded by shortages of foreign currency.
In the short term, these reforms are severely impacting the purchasing power of Egyptian consumers and businesses with inflation reaching some of the highest recorded rates. This has especially impacted automotive prices.
Vehicle prices in Egypt witnessed huge increases following the decision by the Central Bank of Egypt to float the Egyptian pound’s exchange rate. A survey conducted by the Daily News Egypt newspaper found that new-vehicle price changes ranged from 9% to 105%, with Toyota models the most impacted with a 105% jump in prices. As a result, the Egyptian automotive market witnessed a significant drop in sales of almost 50% due to the decline of purchasing power by both consumers and businesses.
The sales of new vehicles declined in June by 38% compared to the same period in calendar-year 2016. The total automotive market declined to 10,007 units sold compared to 16,350 the prior year, according to a report issued by the Automotive Marketing Information Council (AMIC).
The report showed a sales decline in passenger car units by 44% during the same months, recording sales of 6,800 cars, compared to 12,200 units in June 2016.
The sales of trucks also declined by 20.6% to 2,009 trucks sold in June 2017, compared to 2,640 trucks in 2016.
Year-to-date, from January 2017 to June 2017, there was a decline of 44% in sales to 56,400 units sold in 2017 compared to 101,600 during the same six-month period in 2016.
The sales of passenger cars in 2017 declined by 43.5%, recording sales of 39,900 units, compared to 70,800 units in 2016.
The sales of 2017 trucks have declined by 45.9%, with 10,200 sold units compared to 19,005 sold units during the same period in 2016.
In 2016, Korean brands were the top-selling models in Egypt, with sales of 46,100 cars from January to December.
Japanese brands ranked second, with 40,680 units, followed by European brands, with sales of 19,500 cars.
American brands sold 18,700 vehicles in 2016, occupying the fourth position in the list of bestselling cars within the Egyptian automotive market.
Chinese brands occupied the fifth position, with sales of 16,600 units, a growth of 1.8%.
State of the Egyptian Economy
In fiscal year 2017, the gross domestic product (GDP) of Egypt is expected to grow by 3.9%, largely driven by public investment, and to a smaller extent, a boost in exports due to the Egyptian pound’s lower exchange rate.
Tourism is expected to steadily recover because of the weaker currency, which should stimulate the local car rental industry. Yet, economic growth will likely be undermined by decreased private consumption due to the eroded purchasing power of Egyptian consumers, which are being simultaneously battered by record-high inflation rates. In addition, unemployment remains high, especially among younger workers.
These economic pressures were made worse by a second fuel subsidy cut in June 2017. In addition, the value-added tax (VAT) was increased to 14% to assist the Egyptian government in moderating its large budget deficit. The VAT was first introduced in Egypt at 13% on Oct. 1, 2016 to replace the 10% sales tax. The purpose for introducing a VAT was to improve the efficiency of tax collections and broaden the tax base.
Last July, the Central Bank of Egypt significantly increased interest rates across the board for the second consecutive time, in an attempt to keep a lid on prices, which have soared since the pound was floated last November. The Egyptian government sees tackling inflation as its top priority using reform measures and significantly tighter monetary policy.
In a bid to ease the pain of higher taxes, higher interest rates, a reduced fuel subsidy, a weaker currency, and record inflation rates, the Egyptian government announced a USD$4.2 billion social package, which doubled food subsidies and raised pensions
Jordan Fleet Market Conditions
With record high unemployment and sluggish growth, the economy of Jordan continues to be dragged down by the repercussions from the Syrian crisis, especially the presence of more than 655,000 registered Syrian refugees.
Jordan’s main challenge is to stimulate job-generating growth. Unemployment reached a historical high of 15.3% in 2016. Tight fiscal and monetary policies are expected to continue as Jordan works toward fiscal sustainability and a lower debt-to-GDP ratio.
Jordan’s economy remains sluggish as growth slowed down in 2017 for the third year in a row. This is largely due to a weaker mining and quarrying sector, partly related to downward pressures on global potash prices, and other factors related to the Syria crisis, notably the closure of export routes to Iraq and Syria and lower tourism.
Despite these economic headwinds, the outlook for the automotive market in Jordan, in particular, fleet, is much better.
“Jordan has a healthy fleet market environment for rent-a-car companies (RAC) and government fleet sales,” said Seyar Shunnar, regional manager – Fleet & CPOV for General Motors, who is based in Dubai.
Although Jordan has a value-added tax (VAT), the market has adapted to the tax as a cost of doing business. “A VAT might lead to a higher total cost of vehicle ownership. TCO will be higher, which could cause pressure to shift to medium or smaller size vehicles to reduce costs.”
According to Shunnar, out-of-service fleet vehicles in the Middle East are sold at retail sales. “In many cases, fleet operators liquidate their vehicle through internal used cars department, which is especially the case in Jordan,” said Shunnar. “Other ways to remarket out-of-service vehicles are trade sales. These vehicles are wholesaled to traders who can re-export the vehicles to North Africa or Levant countries. The focus is on passenger vehicles due to high customs and fuel cost in these regions.”
Shunnar says another remarketing channel to liquidate old fleet vehicles is at auctions, but these are primarily public auctions. The final remarketing channel is dealer buyback, but this is limited across the region.
Bahrain Fleet Market Conditions
Bahrain is the most economically vulnerable country in the Gulf Cooperation Council (GCC), which is a regional intergovernmental political and economic union consisting of all Arab states of the Persian Gulf, except Iraq. The GCC member states include Bahrain, Kuwait, Oman, Qatar, and Saudi Arabia.
Bahrain faces economic uncertainty due to low oil and bauxite prices, compounded by its limited savings and high debt levels, leaving it exposed to financing risks.
Cheap oil continues to test Bahrain’s economic resilience. Bahrain maintained an expansionary fiscal policy since 2009 resulting in government budget deficits. The deficit spending helped maintain economic growth at 2.9%, but it brought currency reserves down to a low level at 2.6 months of imports and increased public debt to 62% of GDP.
Economic growth is expected to decline in 2017. Real GDP growth projections have been revised downward to 1.9% in 2017 and 2018, as continuing low oil prices depress private and government consumption.
Some infrastructure investments are also likely to be put on hold, which will impact fleet sales to the local construction industry.
Average inflation is expected to decrease to 2.1% in 2017 as economic activity cools and temporary subsidies are phased out.
Kuwait Fleet Market Conditions
In Kuwait, the economy grew by an estimated 3% in 2016, supported by higher oil production and implementation of its economic development plan. A partial recovery in oil prices over the past year has partially eased its recent fiscal pressure. Major infrastructure projects will continue to support the economy’s growth in the near to medium term, which will positively affect fleet sales.
“Kuwait has a healthy fleet market environment for RACs, leasing, and government fleet sales. Small to medium enterprises (SMEs) are still growing,” said Shunnar.
But, key challenges will continue, which include hydrocarbon dependence and parliamentary opposition to deep structural reforms.
OPEC-related oil production cuts are expected to slow GDP growth to 2.5% in 2017. However, the government plans to invest USD$115 billion in the oil sector over the next five years, which should boost oil production starting around 2018.
With additional support coming from public-investment spending, growth is anticipated to rise to about 3.2% over the medium term.
A VAT will be introduced in 2018, which will put upward pressure on fleet total cost of ownership by increasing vehicle acquisition prices.
Qatar Fleet Market Conditions
The number of passenger cars in use in Qatar is expected to reach about 912,000 units by 2020, registering the highest annualized growth of 5.4% in the Gulf Cooperation Council (GCC) region.
“Qatar has a healthy fleet market environment for RAC and government fleet sales. SMEs are still growing,” said Shunnar.
A high urbanization rate and increasing number of affluent consumers have been propelling demand for different types of passenger cars. Qatar is likely to see a net addition of around 213,000 cars by 2020.
The number of passenger cars in use in Qatar is projected to account for about 7% of the GCC car fleet in 2020.
According to the International Monetary Fund, Qatar’s population is forecast to grow at 3.1% between 2015 and 2020. The increasing population base is expected to further stimulate demand for automobiles in the country.
New-vehicle sales in Qatar in 2016 were dominated by Toyota with a 36.5% market share. Toyota sales were boosted by the launch of a new version of the Toyota Land Cruiser and the ongoing popularity of the Lexus LX, which jumped to third place, its best ever ranking in the world. Overall, the Lexus brand in Qatar has gained a 5.3% market share in the country.
Growth in the later years is likely to be supported by an expected increase in population and tourist arrivals in the build-up to the mega football event in 2022. The government is investing billions on infrastructure projects to prepare itself for hosting the 2022 FIFA World Cup mega event.
During 2010-2015, Bahrain, Qatar, and the UAE recorded the fastest increase in new vehicle sales in the range of 8.8% to 10.7%.
The growth is attributed to the strong domestic economy and growing population. The country’s population has grown by more than 8% during the five-year period, as migrants are attracted to the job opportunities being generated by the country’s substantial economic development projects. Passenger cars represented 80.1% of the total new vehicles sold in the country in 2015.
As low oil prices have persisted, fiscal and current account balances in Qatar have shifted to deficits. As a consequence, the government has pared back current spending and undertaken subsidy reform. However, continued spending on 2022 FIFA (Fédération Internationale de Football Association) World Cup capital projects is shoring up growth. Qatar is in the midst of a multi-year multi-billion dollar infrastructure upgrade ahead of hosting the World Cup, which will stimulate construction, transport, and services. With FIFA-related investment beginning to plateau, growth is expected to gradually stabilize around 2.5 % in 2019.
The 1.4 billion cubic feet per day Barzan gas project is set to start production in 2017. As gas production increases and oil prices recover, export earnings should recover.
The forecast is that the fiscal deficit will narrow, helped by savings in current expenditures, subsidy reforms, and the introduction of a value-added tax (VAT). With a VAT to be implemented in Qatar on Jan. 1, 2018, there is an expected trend of increased purchases in Q4 2017 to pull sales from Q1 2018 to avoid the VAT tax, especially for big ticket purchases.
Saudi Arabia Fleet Market Conditions
Low oil prices continue to challenge growth and fiscal sustainability in the Kingdom of Saudi Arabia (KSA). For first half of 2017, vehicle sales in Saudi Arabia declined double digits.
“Saudi Arabia has an unhealthy fleet market environment for small to medium-size enterprises (SME), due to the declining economy,” said Shunnar.
The decline in oil prices has resulted the Kingdom’s worst economic slowdown since the global financial crisis of 2009-2010. The downturn in oil prices impacted many small and medium enterprises, along with larger corporations that were contracting with the oil industry, due to pending payments and large payables owed by governmental entities. This caused projected completion dates to lengthen, which required some companies to extend lease terms. This forced fleets to keep vehicles in service longer, extending the vehicle’s lifecycle costs. In addition, the government decreased fleet purchases for governmental entities.
In addition, earlier austerity measures dampened consumer sentiments defering automotive purchases. However, these austerity programs have since been somewhat relaxed. One recent development that may spur future sales is that, for the first-time ever, women will be allowed to drive in Saudi Arabia starting in June 2018.
However, the outlook for future sales of commercial vehicles in Saudi Arabia is positive. Anticipated stabilization of crude oil prices, implementation of favorable government initiatives, growing infrastructure construction and logistics industry will drive sales of trucks, buses, and vans in the Kingdom.
According to a report entitled, “Saudi Arabia Commercial Vehicles Market Forecast & Opportunities, 2021,” the market for commercial vehicles in Saudi Arabia is projected to grow 9% during 2016 to 2021, based on robust infrastructural developments coupled with growing logistics requirements arising from increased construction activity. Moreover, increasing number of smart city projects and growing population coupled with growing government’s focus on promoting energy efficiency are some of the other major factors anticipated to positively influence the commercial vehicles market in Saudi Arabia over the next five years.
The tourism industry in Saudi Arabia is cyclical and is largely restricted to religious pilgrimages. In August 2015, for over 200,000 pilgrims who arrived in Jeddah and Medina, approximately 17,700 buses were deployed to transport these pilgrims. In order to address increasing transportation needs to accommodate the huge number of pilgrims during Hajj, the Saudi Arabian government is importing new buses with advanced technology to operate in harsh climate conditions, which will boost the country’s commercial vehicle market.
In order to accommodate growing vehicle fleet demand of the Kingdom, Saudi Arabia General Investment Authority (SAGIA) plans to increase investments toward strengthening and expanding the country’s road infrastructure. The Kingdom’s Ministry of Economy and Planning is increasing overall spending to USD$27 billion to improve and expand the country’s road infrastructure. These infrastructure projects are anticipated to boost the sales of commercial vehicles.
Austerity measures were announced in September 2016 as part of an ambitious plan (Vision 2030) to repair public finances and revamp the oil-dependent economy of Saudi Arabia. Two noteworthy aspects of Vision 2020 are:
- Ministers will take a pay cut of 20% and 15% to Shura council members, with bonuses canceled for the financial year.
- In addition to pay cuts, they will pay their own phone bills and government-sponsored cars will be discontinued.
Decreases in automotive sales have been noticeable due to lower consumer sentiment and lower internal/national tourism impacting the RAC industry. Small- and medium-sized businesses, along with large corporations contracting with the oil industry, are being affected due to reduced purchases and extended project completion dates. In terms of fleet vehicles, there are pressures to extend vehicle lifecycles at fleet operations. Austerity measures have decreased government fleet purchases.
Other fiscal and political pressures are mounting within the region due to the economic and diplomatic blockade against Qatar that Saudi Arabia and its allies implemented on June 5, 2017. While the economic impact of the embargo on the Saudi economy is expected to be limited, a potential escalation of the crisis is a concern.
The 2017 GDP for Saudi Arabia is expected to contract by -0.7%, while the non-oil economy is expected to contract further by -1.1%. The forecast is the GDP will start to improve to recover in 2018 with increased tax revenues following the VAT introduction.
There is a substantial budget deficit of $17.4 billion as a result in borrowing money for first time ever from international investors.
In addition, there is weaker import demand signaled by drop in a value of letter of credit by 20%, amid economic uncertainty.
Year-over-year growth in bank credit to the private sector in March turned negative for the first time in 11 years.
In other recent automotive news, SsangYong agreed to license CKD assembly to the Saudi National Automobile Manufacturing Company (SNAM). The agreement allows SNAM to “localize” key components and provide training and other technical support. SNAM aims initially to build mid-size pickup truck with production capacity of 25,000 units annually by 2020.
The KSA government is offering “interest-free” loans to companies in labor-intensive industries to stimulate the economy.
Emirates Fleet Market Conditions
The economies of the United Arab Emirates (UAE) remain in fairly good shape, with the oil sector firms benefitting from solid domestic demand. In addition, the number of tourist arrivals increased significantly in Q1 despite a stronger dirham, the national currency of the United Arab Emirates.
“The UAE continues to have a healthy fleet market environment for RACs and government. SMEs are still growing,” said Shunnar
The UAE economies have weathered the storm of low oil prices better than its GCC neighbors thanks to a relatively diversified economy and significant fiscal buffers. In addition, the relative ease of doing business in the country is a major draw for foreign investors.
The OPEC-mandated oil production cuts will limit growth in 2017, but as projected oil prices trend upward, oil production capacity rises, and investments ramp up ahead of Dubai’s Expo 2020, growth is expected to pick up in the medium term.
Low oil prices and fiscal austerity continue to weigh on the UAE’s economy. Austerity measures weakened business and consumer confidence and slowed growth in credit to the private sector in 2016.
The forecast for 2018 is that oil production will rise due to investments in oilfield development. Non-oil growth is projected to rebound as the expected improvement in oil prices; as megaproject implementation ramps up ahead of Dubai’s hosting of Expo 2020; and as the lifting of sanctions on Iran translates into increased trade. Expo 2020 is expected to draw in a large number of visitors to the UAE, boosting private consumption and services exports, and stimulating the car-rental industry.