In the world of investing, blind faith must be sidestepped for theory and evidence.
Last July, the fact that car sales have been down for year, I suggested that car sales may have reached its peak [Has Peak Auto Sales Arrived? July 16, 2017]
Back then, media headlines were unanimously bullish. Now, such sanguinity has apparently subsided.
-Philstar.com, Vehicle sales grow 16.7% in 8 months September 16, 2017
-Autoindustriya.com, Philippine auto sales continue slowdown in August 2017 September 16, 2017
-Business Inquirer Car makers report sluggish sales in Aug. September 16, 2017
-Manila Bulletin, Auto sales slacken 4.4% in August but post 16.7% growth in 8 months September 15, 2017
The Manila Bulletin attributed August’s lackluster growth to the seasonal effects, in particular, the “ghost” month.
Autoindustriya blamed the recent crackdown on the Transport Network Companies (Uber and Grab).
The Business Inquirer suggested that the slowdown had been unexpected, “The slow output in August comes in spite of expectations that there would be a boost in sales as people rush to buy cars to avoid the proposed hike in auto excise tax.”
Let me first point out that the domestic currency, the peso, undergirds most of the auto transactions in the Philippines.
Hence, the currency’s condition should be a vital factor in the conduct of in-depth investigations of the auto industry.
Incumbent BSP policies reflect on “Intensive Care (ICU) or emergency” conditions. Policy rates are at an ALL TIME low. The BSP has deployed, at an UNPRECEDENTED scale, the MONETIZATION of the National Government’s (NG) debts (Php 341 billion in 2016; Php 47 billion Jan-July 2017). Additionally, wholesale funding in HISTORIC proportions have been utilized to bolster Gross International Reserves (GIRs) through its foreign exchange assets (August US $4.6 billion-preliminary).
Previously, these emergency central bank tools have been deployed only when the economy or the financial system has been confronted by a ‘shock’, or a severe dislocation
And it has not just been the BSP. The government has been running RECORD deficits (Php 353.4 billion in 2016; Php 205 billion January to July 2017).
Again, deficits of the present scale emerged during economic stress or in previous fiscal policy responses as “stabilizers” to such shocks or dislocations, e.g. the response to the Great Recession.
Incidentally, the BSP and the NG has opted for the MONETIZATION route to finance record fiscal deficits. So while debt levels look “cosmetically” good, the opportunity cost has been borne by the peso serving as the sacrificial lamb for political convenience.
The consequences of these combined policies have been the negative real rate regime, which alternatively meant the flooding of the economy with pesos.
And since negative real rates reward borrowers at the expense of savers, institutions that depend on leverage have been the principal beneficiaries of such policy based invisible transfers.
And the automotive industry is one such industry which “demand” or “sales” largely depend on credit.
Thus, a fascinating paradox, signified by a slowdown in auto sales in the ambiance of an unparalleled degree of systemic liquidity expansion, has been developing.
Credit-based demand for the industry, as the Philstar noted: “CAMPI expects total industry sales to reach another record high of 450,000 units by the end of the year on the back of continued motorization in the country, coupled with more attractive financing options for car buyers.”
The milestone peak in the growth rates of unit car sales was in July 2016 which clocked in at 40.08%. During the same period, the banking system’s car loan portfolio grew at a record 37%. Since the climax, the growth rates for both unit sales and car loans have been subsiding materially for the past 13 months.
In August 2017, the growth rate of unit car sales was at 8.74% while July car loans was at 28.14%
In short, this slowdown appears to be a formative trend and barely an anomaly.
Media’s role is usually designed to confirm the public’s biases. Hence, the narrative of reality has frequently been framed in the context of rationalizations
The annual sales growth for the month of August in the past three years has been as follows: 2015 +21.27%; 2016 +40.08% and 2017 +8.74%. So the so-called GHOST month appeared only in 2017 while dozing off in 2015 and 2016!
For the past 8 months, 2017 growth rates at 16.75% have tumbled from 2015’s 20.46% and from 2016’s 28.29%.
Even nominal unit sales appear to be plateauing (see below)
If I am a Public Relations/Corporate Planning Officer of the CAMPI or of the auto industry, I would publicly disclose that the reduction in growth rates signifies a natural phenomenon. It should be EXPECTED.
Because the auto industry’s performance would generally manifest the market’s saturation level, this would lead to diminishing returns.
The previous high growth rates have been mainly due to the base effect, or specifically, the previous low levels of auto ownership.
These growth rates also signal the rate of diffusion of auto ownership in the target market. The natural limitations of markets, which represent the saturation point would, therefore, serve to limit expansion activities. The industry’s growth rates would accrue from economy’s marginal value-added outputs and from the population growth.
Thus, the industry’s growth rates would eventually align with NGDP. In other words, the industry CANNOT PERPETUALLY outgrow the OVERALL economy.
But who is interested in real economics? What mainstream economics represent has been nothing more than cherry picking of statistics from which numbers are projected in a continuum.
And since the public have been hardwired to believe that credit inflation growth would have no bounds, expectations have been built on the eternality of high growth numbers.
Of course, the fictionalized for-public consumption explanation by an industry representative is insufficient.
Industry growth rates have been magnified by credit-financed demand or sales.
The present downshift may likely have been from the three aspects.
First, credit-financed demand has fast-tracked the approach to the market’s saturation levels. Put differently, because future demand was dragged into the present, as evidenced by 30-40% growth rate in 2016, the approaching limits to the market’s capacity reduces its growth potentials.
Second, debt levels of eligible bank borrowers may have nearly reached maximum credit capacity.
Third, there has been insufficient income growth to support debt-financed auto demand.
As one would note from the chart (above-lower pane), the huge ramp in money supply growth from the BSP’s secret stimulus in 2015 to 2016 has initially boosted the auto industry’s sales. But the tapering of money supply growth in 2H 2016 dovetailed with the fall in demand for automotive vehicles.
Although the BSP reactivated its secret stimulus in the May to July this year, surprisingly and unfortunately, auto sales have not responded. In fact, growth rates of M3 and auto sales have gone in opposite directions
The government’s assault on Transport Network Companies (Uber and Grab) may have aggravated this. Such needless intervention was something I wrote about last July. And since Uber and Grab’s capacity, reportedlyat 66,000 and 53,298 respectively, have grown a lot, the law of diminishing returns will likely affect their operations. Hence, the industry’s slowdown has hardly accounted for as the major cause.
Interestingly, the bump from the proposed increases in car sales taxes from the DoF’s tax reform program (TRAIN) have also, so far, failed to perk up sales.
Perhaps, a time lagging effect from the latest jump in money supply growth on sales performance could have been a reason.
But there is one thing clear. Last April, I wrote that the impact of a slowdown in the credit-financed auto industry would spillover to its ecosystem or ripple through its supply chain linkages. [See The Auto Industry’s Ecosystem Fundamentally Depends on Credit Expansion; Dutertenomics: The Golden Age of Free Money for Big Government, SM as BSP Chief? The Auto Industry’s Ecosystem April 23, 2017]
Consulting firm AT Kearney provides a wonderful diagram of the automotive industry’s ecosystem (below pane). The industry’s supply chain has been categorized into the core industry (car production), the upstream (production or input suppliers) and downstream (distribution, marketing, finance and post-sales industries).
The slowdown in the domestic auto sales has likewise filtered into the automotive industry’s production. Sales drive production. Based on the Philippine Statistics Authority’s data, growth in production rates of Transport equipment meaningfully decelerated to 8.4% in July 2017 from 12.4% in June of this year and from 35.74% in July of 2016. Thus, falling sales translates to a downturn in production – with some time lag.
The industry’s production slowdown has also dragged the overall industrial production growth picture, which not only downshifted but turned NEGATIVE (-2%) last July.
So the slowdown in the auto industry has not only affected credit conditions (affecting banking’s income) but also weighed on the industry’s output, its supply chain and most likely, the general economy. Thus consumer demand related to the automotive industry’s supply chain will also be affected.
Nevertheless, the industry continues to make significant investments to expand capacity! And most likely the upstream and downstream of the supply chain has also been building additional capacity in line with the core industry.
Interesting.
Asia’s race for yields has spilled over to the Philippines such that the PSEi hit a new record last week. Most of these had been from spiking M3 and from the brazen manipulative pumping.
And this record high comes as foreign direct investments and car sales have turned lower (more later…)
Stock prices have become totally detached from economic reality!
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