Nigeria Autos Report Q3 2009

The uncertainty that has hung over the Nigerian autos market since reports surfaced of the likely closure of Peugeot Automobile Nigeria (PAN), the country’s only still-functioning car maker, has not lifted. If anything, the slow-impacting global financial crisis has further reduced confidence, a process compounded by the country’s chronically performing power sector, ailing road and other infrastructure and even perhaps political insecurity and investor fears raised by problems in the Niger Delta region. The second quarter saw various reworked policy proposals raised to handle the downward spiral, including revised versions of older solutions such as state-backed loans and capital injections, but no new concrete proposals were apparent and no clear strategic direction. According to Reuters, which quoted Central Bank Figures, credit to the private sector from the banking sector only grew by 0.3% in Q109. This compares with 25% growth in the same period in 2009. The authorities are targeting single-digit inflation. However, inflation is likely to remain in double-digit territory this year, especially given the renewed pick-up in food prices. This will impact on interest rates and, with domestic demand already depressed, any recovery in the domestic autos market may be delayed - if the market recovers at all. With production at PAN possibly ceasing entirely in the coming months, we still do not expect the country’s other suspended facilities to revive over the medium-term, although the possibility still theoretically exists for the government to throw a lifeline to PAN. In our view this is unlikely without a serious foreign investor, and at present the business environment is too risky for significant new investment, particularly in the current economic environment. Meanwhile, according to the Automobile Association of West Africa, a number of assembly plants in Nigeria have not been producing to their full capacity. For example, production at the PAN plant was estimated at around 37% of total production, while the Mercedes-Benz ANAMMCO plant was reported to be operating at 30% of capacity. Partly as a result of this, the majority of new cars sold in Nigeria have been imported into the country. The government has not moved very far forward, if at all, on concrete plans to deal with the crisis hitting the domestic car market, despite the fact that domestic manufacturing could grind to a standstill with if PAN production closes in the country. This apparent stasis is in part due to uncertainty over the global oil price, which has reduced budget inflows (the federal budget is around 85% dependent on oil export revenues); lower GDP growth and fewer remittances from abroad. There is weakened confidence in the country as an investment destination generally, due to lower risk appetite, but also due to problems in the oil-producing Niger Delta region. This combination of factors, combined with pressure on over-leveraged banks and a tightened lending regime, mean that a clear strategy for coping with the collapse of the auto sector may come too late to have any decisive affect on the domestic production market, although sales will likely pick up as oil prices rise going into Q309.