A downgrade in our 2012 economic outlook for Sudan from an already dismal forecast of 1.1% to a contraction of 1.4% gives us little hope for a recovery in new vehicles market this year. Despite contractions of 72% year-on-year (y-o-y) and 15% y-o-y respectively during 2010 and 2011, we expect a further 4% y-o-y contraction in new vehicle sales this year. With 2012 new vehicles market expected to reach only 2,700 units, the market will be more than four times smaller than the record 12,300 vehicles shifted in 2009.
Demand will be affected by cutback in spending by both private consumers and the government. Inflation has begun to rise dramatically (standing at 37% in June 2012), meaning that other spending commitments will take priority over big-ticket purchases such as cars. Meanwhile, the government is faced with an enormous budget deficit - currently estimated by government officials to be around US$2.4bn - which will see spending on fleet purchases being curtailed.
However, following a period of belt-tightening in the immediate post-secession period, BMI sees opportunities for the autos sector, with the commercial vehicle segment again the major beneficiary. The development of the country's mining sector is gaining traction and we believe if the exploration phases prove successful and activity picks up, this will generate considerable demand for heavier vehicles. A key risk, however, is the increasing tension between Sudan and South Sudan which threatens the oil sector in both countries, prompting our Oil & Gas team to revise down its combined oil production and export forecasts.
This poses risks for potential investors in the autos sector. A number of Kenyan auto dealers are looking to set up sales units in South Sudan, attracted by the potential income from the new country's oil reserves.
The poor infrastructure means that most of the dealers are focusing on sales of trucks, which are better equipped for the terrain, but BMI believes there are other risks to this strategy, not least the escalating tensions with Sudan over oil production and transit fees.
Early movers into the market include DT Dobie, representative of Nissan Motor, and China's Foton East Africa, which has already invested in domestic production in Kenya to serve the wider region. Foton has already reached an agreement with a local dealer in Juba, and will begin exports of its pick-up and light trucks.