Serbia Automotives Report Q1 2007

Moderating retail activity and a deceleration prompted BMI to revise its 2006 automotive sales growth estimates down to 7.1%, from 8.0%, in the latest Serbia Automotive Report. Sales growth is not expected to drop further in the forecast period. GDP growth is forecast at above 6.0% in 2007, with inflation set to diminish as a result of a strong currency unit following hikes in interest rates by the Central Bank. The success of the monetary policy in keeping inflation down means an easing of interest rates is on the cards.

A strong exchange rate will also help reduce the price of vehicles. This coupled with lower interest rates, will stimulate demand within the automotive market. A rapid descent of interest rates should pave the way for accelerating consumption and investment going forward, helping to stimulate automotive sales over the forecast period with growth of 8.0% or above.

Automotive market expansion has not led to a rise in sales for local car manufacturer Zastava. Serbian vehicle production fell by 6.6% y-o-y in 2005. A total of 14,180 vehicles were produced in 2005, including 12,574 passenger cars and 1,800 commercial vehicles. BMI believes that Zastava failed to meet its production forecast of 18,000 units for 2006, with 16,450 intended for the domestic market. BMI estimates that car production rose by just 2% to 12,825 units in 2006, while commercial vehicle production fell 0.7% to 1,788 units, with total output at 14,613 units, up by just 1.7%. The figures are a fraction of the output achieved in the late 1990s, before NATO bombed the Zastava factory.

Zastava's agreement with Fiat (which allows it to produce Punto models) and buoyant domestic demand should help support future growth. The carmaker expects the first Punto models to roll off the assembly line in June 2007, with output rising to 4,000 units by the end of the year. Passenger car output is set to accelerate for the rest of the forecast period, increasing by 10% in 2007 with the introduction of the Punto. This is a downward revision from the 15% forecast in the previous quarter due to further delays to the beginning of Punto production, which has been pushed back yet again from end-March 2007. By 2011, output should reach around 25,750 units, with the Punto gradually replacing Zastava's outdated models. If agreed, a second model should boost Zastava's fortunes even further.