The period of double-digit growth in Latvia since 2004 finally seems to have cooled off, according to BMI’s 2009 Latvia Automotive Report. While the government’s anti-inflationary policies have clearly helped to check a significant increase in vehicle demand from as early as H207, tighter credit conditions towards the beginning of 2008, worsened consumer sentiments in the Latvian economy which is now heading for a deep recession in 2009.

The Latvian economy contracted by a staggering 10.5% year-on-year (y-o-y) in Q408, having declined by a perilous 5.2% in the previous quarter. According to the Latvian Authorized Automobile Dealers Association (LPAA), total vehicle sales fell by nearly 41% y-o-y to 23,226 units in 2008 due to the 41% y-o-y and 40% y-o-y drop in passenger car and commercial vehicle sales, respectively. Backed by our forecasts of an economic contraction of 9.1% in 2009 and 1.6% in 2010, BMI forecasts vehicle sales to drop by another 40% y-o-y in 2009, followed by almost stagnant demand conditions in 2010. Our core view suggests that economies such as Latvia will be slow in recovering from the crisis implying that Latvia’s car ownership rates is unlikely to match the EU average within the next five years. Towards the end of our forecast period at end-2013, we expect total passenger car sales to reach close to 15,300 units, but nevertheless will remain far below the level of 32,500 cars sold in 2007.

The market for both small and premium cars remained gloomy, clearly indicating the lack of financing and car leasing kept buyers away from the purchase of big ticket items such as cars. Despite the tough market conditions, Toyota Motor maintained its lead in the market with sales falling by 40.3% y-o-y to 2,337 units, and market share increasing slightly from 12.0% in 2007 to 12.1% last year. Volkswagen (VW) overtook Škoda Auto’s position as the second largest carmaker by increasing its market share from 8.2% in 2007 to 11.1% last year and sales reaching 2,133 units in 2008. Škoda followed VW to make to the third position after selling1,493 units, down by 43.9% y-o-y, last year.

Latvia lacks manufacturing facilities, much like other Baltic states, and this has remained as one of the primarily reasons for the poor score of Latvia in BMI’s business environment rankings. Nevertheless, the market where carmakers mostly operate through their authorised dealerships saw some major reshuffles last year. Peugeot has made a subsidiary company of the Estonian Uhendatud Kapital-Auto Forte Latvia, its authorised car dealer, while Bensons Auto had to break its partnership with Honda Motor last year. Meanwhile, Korea Auto, a Hyundai dealer in Latvia, signed a sell-purchase agreement with Amserv Grupp to increase the latter’s distributorship to six carmakers, Toyota, Lexus, Opel, Chevrolet, Saab and Hyundai. BMI believes that the dealerships will resort to competitive pricing and focus on limiting costs until the next year to meet their annual targets and to maintain their financial status.