Falling automotive demand could not limit US dollar revaluation's impact on prices

Now is the time to buy new cars despite uncertainties surrounding the future, says GB Auto's Drive

On the back of the novel coronavirus (COVID-19) outbreak and its negative impact on global economies, Egypt witnessed last week the fastest and highest appreciation in its local currency against the US dollar since the beginning of the year. However, the Egyptian pound has picked up against the American currency in the last few days, settling on Wednesday at EGP 16.12 to buy and EGP 16.24 to sell, according to the Central Bank of Egypt (CBE).
According to experts and bankers, Egypt is currently facing a lack of foreign exchange inflows, which in turn requires financing the urgent balance-of-payments needs. This comes on the back of the slowdown in remittances, the suspension of tourism, and the coronavirus-fuelled outflow of capital.
They added that the past few months have witnessed a noticeable increase in demand for the US dollar. This was a knock-on effect on the back of increased imports of production inputs and commodities, and the repayment of loans and international bonds. Moreover, foreign exchange reserves fell to $26bn in May after seeing a 3-month decline, during which nearly $9.4bn was spent.
Automotive sector experts believe this situation will directly affect car prices in the coming period, especially since exchange rates are among the most important variables in pricing.
Ahmed Osama, Managing Director of Drive, a subsidiary of Ghabbour Auto (GB Auto), said there are several reasons that have led to an increase in US dollar exchange rate against the local currency.
Of these, the disruption of the tourism sector which is one of the most important sources of national income. Egypt's tourism was significantly affected by the consequences of the global health crisis, following the closure of the country's airports and suspension of international flights.
The halt in tourism, upon which Egypt relies heavily, has clearly contributed to the limited supply of the US dollar, which is basically affected by the higher demand from foreign investment institutions trying to withdraw their capital from Egypt.
Osama praised the Egyptian government's efforts to balance the exchange rates through negotiating $5.2bn emergency loan from the International Monetary Fund (IMF). He noted that the government has also been working extensively on gaining other external assistance that has contributed greatly to the stock market recovery.
He explained that the continued rise in the US dollar value would cause car prices to increase in the coming period. This comes especially as indicators relating to the coronavirus crisis were pointing to negative conditions in all economic sectors. The market downturn prompted some consumers to purchase cars during April and May, even though the Traffic Department closure meant they would not be able to get licences for their vehicles.
Osama stressed that now is the time to buy new cars despite uncertainties surrounding the future. He noted that the exchange rate will not only affect imports, but also customs, VAT, development fees, and taxes which would, in turn, hike car prices, especially if a parallel currency market emerges.
Osama pointed out that his company was not significantly affected by its participation in the CBE initiative to postpone all credit dues for individuals for six months.
He noted that, although it was only slightly affected by the coronavirus-related repercussions, the company's portfolio is characterised by high credit quality. The company ensures that it undertakes certain procedures guaranteeing its financial rights, in addition to its caution in checking the customer's credit rating.
Karim El Naggar, Chairperson of Kayan and CEO of the Egyptian Automotive and Trading Company, said the recent Egyptian pound's depreciation against the US dollar will affect car prices in the long run. Agents and distributors have an acceptable stock of cars as a result of the previous market recession due to the coronavirus crisis, where demand declined for three months.
He noted that once the inventory is depleted, new imported cars will be more expensive when they arrive in three months.
El Naggar said the local market has seen a major drop in the number of cars released from customs over the last three months, with only 6,000 vehicles released during May.
"If the current condition lasts, sales will drop to 100,000 units only," El Naggar said. "This is a very low and frightening figure."
He added that the increase in car prices is inevitable as a result of higher exchange rates and a slowdown in sales, which will only serve to create a worsening crisis within the automotive sector.
Sherif Fahim, Director of Marketing for Kia at the Egyptian International Trading (EIT), said the US dollar value is one of the most important variables controlling car prices. It represents a direct cost, as exchange rates change, which in turn directly reflects on car price, despite low market demand.
He explained that the impact of the Egyptian pound depreciation will not be limited to the cost of importing cars. It will, rather, lead to an inevitable rise in different products' prices due to tax and customs that are calculated according to the CBE exchange rates.
Fahim noted that the automotive sector crisis was exacerbated following the decline in demand for cars over the past three months, and the rise in import costs prompted agencies to adjust their import quotas. This was based on market data and the expected volume of demand, which does not incur huge financial losses to companies in light of high costs and low demand.
Fahim added that his company is in continuous negotiation with the parent company to obtain cars at a lower cost. The move would ensure the greater possibility of offering cars to the local market at competitive prices.
However, the current health and commensurate economic crisis on the back of the coronavirus outbreak has caused a reduction in production capacities as they try to keep pace with global demand.
Importers have also been significantly hindered in their ability to negotiate reduced car prices according to supply and consumer demand, especially in light of the declining imports.