John Zekany, Analyst, Americas Vehicle Forecasts
21 May 2019
21 May 2019
This October, Argentines will head to the polls to elect a new president. The current incumbent, Mauricio Macri, has been in office since 2015 and succeeded a decade-long rule by the Peronist party, which embraces a particular brand of ‘corporate socialism’ blended with nationalism. The tenure of Cristina Fernández de Kirchner (CFK), Macri’s predecessor, was characterised by import and currency controls, protectionism, inflated government jobs and unsustainable subsidies.
The auto industry under CFK was marred by instability, stemming from her protectionist monetary policies. In a bid to redress the trade imbalance, she forced sellers of imported vehicles to become exporters, without caring what they exported. This led to BMW, whose sales suffered a 45% year-on-year decline in 2011, to agree to export rice in exchange for permits to import its vehicles. Porsche, meanwhile, began exporting wine.
CFK’s policies helped to boost consumer spending via below-inflation interest rates and a government-brokered wage increase. This, in turn, allowed for swift increases in year-on-year Light Vehicle sales throughout much of her time in office, until 2014, when the facade began to crumble. Governmental spending had driven inflation up to almost 40% – although it was alleged at the time that CFK ordered the statistics institute to publish more favourable economic indicators to mask the reality of the situation. Foreign currency reserves tumbled to US$27 billion, from US$42.5 billion in 2013, curtailing the government’s capacity to borrow dollars, thus contributing to Argentina defaulting on its bonds in July 2014. As a result, the government began rationing US dollars, which limited manufacturers’ ability to purchase imported supplies and, in the process, stalled vehicle imports. Overall production in 2014 plunged by 22% to 612,000 units, while Light Vehicle sales plummeted by 30% to 634,000.
“Tax cuts for more expensive vehicles meant that the Premium segment saw the fastest rate of growth in 2016 and 2017, at 103% and 65%, respectively”
When Macri took over in 2015, he lifted capital controls, scrapped trade restrictions and ended foreign currency limitations, which led to the over-valued peso falling by almost 50%. Sales then ticked up by 13% in 2016 and soared by 26% in 2017. Tax cuts for more expensive vehicles meant that the Premium segment saw the fastest rate of growth in both years, at 103% and 65%, respectively. This strong growth carried over into the first half of 2018, but the country was then struck by an economic crisis, the origins of which can be traced back to the currency and debt crunches that began in Turkey in early 2018 and had a devastating impact on many emerging markets. Sales in Argentina closed 2018 with a decline of 11%. Even though the government secured a US$57 billion IMF loan, the plunge in the value of the peso, high inflation and interest rates, and falling real wages were major blows to domestic demand.
Up until a few months ago, it was widely assumed that Macri had the election in the bag. But with investor confidence plunging, the peso depreciating sharply against the dollar, and soaring inflation, to assume that his re-election is a done deal would be unwise. Indeed, just a couple of days ago, on 18 May, CFK sent shockwaves through the political arena by announcing that she would run for vice president, alongside presidential candidate Alberto Fernandez, her former head of cabinet. Up until then, she had been expected to compete with Macri for the presidency – a race that she stood a very good chance of winning, according to early polling.
It arguably makes more sense for her to run for vice president, because she is perceived as more radical than Alberto Fernandez. In this new scenario, many voters who are frustrated with Mauricio Macri are now more likely to support a Peronist ticket, irrespective of CFK’s erratic history. She would also benefit from not having to debate head-on with Macri, one of her fiercest critics, and answer for her previous economic policies.
Against this chaotic backdrop, we currently forecast a decline of 33% this year, on total Light Vehicle sales of 512,000 units. If market-friendly policies continue, however, sales could see significant year-on-year growth through the next decade and recover comfortably.
That said, if the Fernandez/de Kirchner ticket were to be victorious, then volatility and a gloomier outlook are by no means out of the question. CFK would wield significant power as vice president and her history of nationalising industry sectors, bullying private-sector companies and engaging in bitter disputes with bond holders who refuse to accept debt restructuring all bode ill for Argentina’s future.
Depending on the election polls that emerge in the coming weeks and months, we may make further downward revisions to our forecasts for 2020 and beyond.