Bulgaria Autos Report Q2 2010

The worsening economic downturn in Bulgaria continues to squeeze the auto market. With a shortage of consumer loans, demand for passenger vehicles has fallen as customers are putting major purchases on hold. New car sales have plummeted more than 50% owing to the effects of the global economic crisis, with a 20-25% fall in car prices, reports Bulgarian news agency BTA. Auto dealers have said that a further decline in prices will force them to sell cars at a loss. The Bulgarian Association of Car Importers estimates 26,813 new vehicles were sold in 2009, down 53.3% from 2008, reflecting that purchase levels of 2007 are not likely to be reached until 2011-2012.

Prices have fallen for several reasons: dealers are keen to retain cash flow and preserve market share in a competitive and tightly-packed market. On the demand side, consumers have been more strapped for cash than in previous years, as credit has tightened substantially while unemployment has risen. Bulgaria has also suffered from a lack of a local car manufacturing industry.

The commercial vehicle market, meanwhile, has been hit even harder. Bus and truck sales totalled only 1,108 in 2009, down 77.1% from 4,115 in 2008, according to the Union of Automobile Importers in Bulgaria (SVAB).

However, SVAB is relatively upbeat about the outlook for the year ahead. In January 2010, SVAB’s deputy chairman, Lyubomir Dorosiev, told the Bulgarian news agency Focus that the market was ‘opening up’ and that he saw ‘good times’ ahead. Dorosiev added that both new and used car prices have bottomed out, and that they can only rise from now on. Nonetheless, sales will stay low until confidence returns. We maintain a bearish attitude for the short term. We expect an economic rebound to begin in 2010, with sales returning to growth. However, this will only be very sluggish at first.

The sector may receive a large boost from plans to start manufacturing cars in Bulgaria. A cooperation agreement between Bulgarian Litex Motors and Chinese firm Great Wall Motor (GWM) could bring opportunities for the Bulgarian automobile industry. Under the terms of the deal, Great Wall will build a plant in Lovech, with investment of around EUR80mn (US$119mn). Production of sport utility vehicles (SUVs) is likely to begin at the plant by the end of 2010.

The inflow of production-linked investment is a top priority for the government, which has been struggling with a huge current account deficit. As such, the government hopes that investments like this will boost the economy's export levels and help reduce the current account gap.

On the macro side, the government has the set the target of adopting the euro by 2013. Given Bulgaria’s current economic problems, this is ambitious, but the country already adheres to most accession requirements, including a low deficit and stable exchange rates. While the lev is already pegged to the single currency, adopting the euro would lock in exchange rate stability, benefitting exporters and importers alike. However, it would also finally remove control over interest rate policy from the Bulgarian National Bank, making it more difficult for Bulgaria to use monetary policy to stimulate the economy in a slump and cool inflation.