VAT to impact car sales in Saudi, GCC: Fitch

Total vehicle sales in Saudi Arabia are expected to decline 10 percent in 2018, as the introduction of 5 percent Value Added Tax (VAT) in the Kingdom weighs heavily on automobile sales, Fitch Solutions Macro Research (a unit of Fitch Group) said in a recent report.

Auto sales in the Kingdom declined by 24 percent in the first quarter, the report said, noting that despite the addition of female drivers to the market from June, the positive impact of this on sales will take much longer.

Similarly in the UAE, auto sales conditions remained tough across H1 2018, with customers continuing to be deterred from making a new car purchase by a high domestic interest rate environment and the introduction of VAT.

“Although a series of Ramadan sales promotions reportedly went some way towards arresting the year-to-date sales declines in the market, new car sales were reportedly down by some 19 percent year-on-year across H1 2018,” the report said.

Fitch also revised down its 2018 new vehicle sales forecasts for UAE to a 12 percent fall, with commercial vehicle sales to outperform passenger car sales. 2018 will be the third consecutive year of double-digit sales declines in the UAE market.

Meanwhile, vehicle sales in Oman will continue to expand in 2018, with 3.2 percent growth, as opposed to an average dip of 2.6 percent in sales across the GCC region, the report said.

Fitch also expects Oman's vehicle sales to continue to average annual growth of 4 percent over its 2018-2027 forecast period.

“Oman will present a sizeable affluent and young adult population, prone to innovative and modern consumer trends, coupled with high urbanization rates which will continue to drive up the demand for new updated vehicles,” it said a report.

In the overall MENA region, however, vehicle sales growth in 2018 will remain behind that of the Sub-Saharan Africa region as the impact of VAT in major GCC markets and the derailment of Egypt's market recovery will dent regional sales.

Fitch forecasts total vehicle sales in the MENA region to grow 3 percent in 2018, down from its previous forecast of 7 percent.

“This is a result of revisions to forecasts for major markets such as Saudi Arabia, where the impact of VAT has been more pronounced than expected, and also Egypt, where rising fuel prices will add to pressure on consumers and dampen demand for new vehicles,” the report added.

However, it expects commercial vehicles to have stronger growth of 6.6 percent compared with 3.8 percent for passenger cars, driven by improved demand from businesses for new vehicles.

“Infrastructure projects related to events such as the Qatar World Cup and Dubai's Expo 2020, as well as tourism industry demand for buses will combine for this CV outperformance to continue into 2019,” it noted.