Serbia Autos Report Q1 2013

BMI has revised down slightly its Serbian vehicle sales growth forecasts for the third successive quarter,on the back of the latest industry figures, which suggest that new vehicle demand remains sluggish, andour expectations of a slowdown in economic growth. We have revised down our forecast for Serbian realGDP growth from 0.4% to 0.2% in 2012 because of a sharp contraction in Q112. The eurozone crisis willweigh on exports and investment, while fiscal consolidation will reduce domestic demand in the secondhalf of 2012 (H212).

We estimate sales to fall 22% in 2012, with total vehicle sales of 24,788. From 2012 to 2017, we expectvehicle sales to grow by a modest 3% year-on-year (y-o-y) on average. Again, this is slightly lower thanlast quarter when we pencilled in an annual average sales rise of 6% y-o-y between 2011 and 2016.In 2012, we expect the overall consumer profile to weaken as fiscal consolidation measures come intoplay from H212, with the aim of bringing the fiscal deficit under control. The country's self-imposedfiscal responsibility rule and the need to comply with IMF conditions will see public spending greatlycurtailed and the imposition of a freeze on public salaries and pensions, all of which will hurt theaffordability of new cars.

We believe the deal between Serbia and the EU calling for a reduction in custom duties on new importedvehicles from 5% to 2.5%, which came into effect from January 1 2012, is unlikely to bolster consumerconfidence and hence vehicle sales in Serbia. We believe that the weak domestic picture, constrainedcredit and poor export revenue from the crisis-stricken EU - its principle revenue earner - will keepconsumer spending curtailed.

The country's fast-ageing population - with as much as 21.3% likely be aged over 60 by 2015 - and poorroad infrastructure are unlikely to make new vehicle purchases particularly attractive to a significantsection of consumers. Moreover, with vehicle loans in Serbia typically having a maturity period of up to15 years, financing on vehicle purchases will be limited to a smaller consumer base.

Things are slightly more encouraging in terms of production, however. Owing to the small size of itsautos industry, Serbia currently ranks lowest in BMI's Risk-Reward Ratings for the autos industry inEurope, but a slew of recent investments in the country's autos industry - particularly on the supply side -pose significant upside risks to its score and ranking in our ratings system.