Bahrain Autos Report Q1 2008

US majors are set to reap growth on the Bahrain automotive market, at the expense of their Japanese and European rivals. BMI forecasts a slowdown in sales in line with a decline in GDP growth, market saturation and congestion. But this should be partly offset by low car finance rates, which will provide an impetus to consumer demand for passenger cars.

The strong performance of US majors on the local market was confirmed by GM's Q307 results, which showed a 23% y-o-y increase in sales to 1,811 units. Growth was witnessed across all its brands including Chevrolet, GMC, Cadillac and Hummer. BMI believes that GM's performance is ahead of the overall market. However, Q3 figures indicate a strengthening of demand over the previous two quarters, suggesting a steady rise in overall sales growth throughout the year. Consequently, BMI has revised upwards its automotive sales estimates for 2007, from 41,000 to 42,000 units, with annual growth at around 13%, up by one percentage point over 2006. In addition to low car finance rates, growth in 2007 was supported by GDP growth of 6.8%.

While average interest rates are likely to remain at around 8.5% over the next five years, car finance rates are likely to be in the region of 4-6% in Bahrain's highly competitive car market. At the same time, we do not envisage a significant adjustment in the exchange rate, even if the Emirati dirham is revalued against the US dollar to counter the effects of depreciation against the euro. This gives US carmakers a competitive advantage on the Bahraini market against European and Japanese firms, which are suffering as a result of the appreciation of the euro and the yen. Overall market performance will be affected by saturation and declining GDP growth, which is forecast to fall to around 4.6% by the end of the forecast period. Consumer demand will also be limited by the problem of congestion in Bahrain and high rates of car ownership. In terms of segment performance, SUVs are likely to see the most robust growth, particularly given the likelihood of domestic SUV production. Overall, BMI envisages a steep downturn in automotive annual sales growth to around 5.0% from 2009.

By 2012, the automotive market should be at least one-third larger than in 2007, with annual sales reaching around 56,500 units. We expect a soft landing rather than a problematic downturn, since oil prices will remain high by historical levels, while oil-fuelled investment has boosted non-oil output capacity. Moreover, diversification efforts mean that Bahrain is less dependent on the oil market than most other Gulf States.