Pending bills, currency fluctuations weigh in on auto market

By Steve UMIDHA

Unpaid or pending bills by the National and County Governments has sapped Kenyan auto sales in five months to May 2023 and a recovery will likely be slow, threating auto workers whose jobs depend on fleet sales.

Coupled with currency fluctuations and wobbly interest rates, auto executives are particularly concerned that continued inability by both set of governments to pay their suppliers, has already seen most of them ‘write off’ the year.

“This year is gone,” offered Dinesh Kotecha, the Group CEO of Simba Corporation – sellers of Proton vehicle brands, Mitsubishi, Fuso, Mahindra, and Same Tractors.

In a telephone interview yesterday, Mr. Kotecha decried the mounting worry in form of pending bills and high interest rates as the most pressing and lingering holdups likely to see the industry perform dismally this year.

Since the beginning of 2020, the Kenya shilling has lost approximately 25 percent of its value against the US dollar.

By November last year, the currency was trading at around Sh117 against the dollar – rising to over Sh140 this year. The Shilling closed Monday trading at Sh138.45 against the dollar.

“There is still a problem out there and until we are able to see some sort of stabilization in terms of interest rates and exchange rates, we will end the year in the same way we did in 2022,” said Kotecha, who is also predicting a reduced pent-up demand from individual buyers.

Arvinder Reel, the Managing Director of CFAO Group which sells Toyota vehicles and Hino trucks, shares similar worries and is “hoping to do at least what we did last year.”

“Government is the largest buyer and with these challenges we have already seen the market shrink by 13 percent. And with high taxation we have also seen disposable income of would-be buyers limited as a result,” said Mr. Reel in an interview yesterday.

In the short term, both agree that fleet sales are not a major concern for automakers who are now focused on ramping up production to beef up lackluster dealer inventories which has existed since the onset of Covid-19.

Figures by the Controller of Budget (CoB), Margaret Nyakango shows that National and County Governments’ unpaid bills stood at Sh637.91 billion as of February 2023.

As of December, last year, ministries had pending bills of 80.2 billion, State co-operations or parastatals had pending bills worth 400.6 billion, while counties had 157.91 worth of pending bills

Pending bills occur as a result of delayed exchequer releases, supplementary budgets that cut funds already committed elsewhere and variations in costs due to delayed payments, among other reasons.

Figures by Kenya Motor Industry Association (KMIA) show that year–on–year vehicle sales for four months to April this year hit just 3,778 total units. The industry sold a total of 2,758 units by the end of March, which was 445 units less than it managed in a similar period last year.

The association has attributed the low retail sales numbers to a difficult first months of the year borne from the brunt of an uncertain economic environment, sending ripples through the auto sector, which has largely dodged a significant hit from inflation this year in comparison to other sectors.

Similarly, economists still feel the slackened economic growth has everything to do with the lingering war in Europe which broke in February 2022, that has caused supply chain bottlenecks and driving up costs for everything from labor to raw materials.

A range of analytical approaches suggest that business investment has been subdued partly due to the effects of Russia’s invasion of Ukraine among other factors like political fights in the form of protests, whose outcomes have reduced the size of the economy and future growth.

The month of March for instance saw a countrywide anti-government protests by the Opposition whose bearing upset business operations largely in Nairobi and its environs, in what private sector body – Kenya Private sector Alliance (Kepsa) said negatively troubled ‘key moving parts of the economy.’

“Kenya is well-positioned to benefit from the global economic recovery, and the threats and interruption of law and order are a risk to sustained economic development,” urged Kepsa in a notice at the time.

But car industry experts are optimistic despite the low numbers and are confident that the situation will mend on political stability, availability of credit by banks, and other financial institutions, as well as improving economic macro indicators.

“We are expecting the market to grow by 15 per cent this year. However, challenges still linger such as the exchange rate depreciation as well as production constraints which are low, but we are optimistic for the year,” Managing Director of CFAO Motors – formerly Toyota Kenya Ltd, Arvinder Reel said in a telephone interview with Business Hub last month.

Macroeconomic indicators like the gross domestic product (GDP) – a monetary measure of the market value of all the final goods and services produced and sold in a specific time period, are statistics or data readings that reflect the economic circumstances of a country or sector.

They are used by analysts and governments to assess the current and future health of the economy and financial markets. Other factors like interest rates, unemployment rates, disposable income, and exchange rates ordinarily affect the growth and performance of the automotive industry.

And so, during a slump, auto sales typically fall, often significantly and many buyers tend to back out of the market until the economy recovers – a kin to the trend seen today.

Similar challenges have also been seen in prices of used vehicles or second-hand cars commonly known as ‘mitumba’ with popular brands like Vitz, and Subaru among other models all increasing prices by hundreds of thousands of shillings on scarcity and weakening the local currency.

Because Kenya’s oil and fuel importers use US dollars to buy fuel, the forex shortage has had a direct impact on the country’s fuel supplies, and by extension, the country’s supply chain. But it has also impacted essential imports such as medicine and food as well as car parts.

Also adding to the pain for would-be new car owners, is the country’s growing appetite to over burden its citizens with high taxes.

Kenya continues to choke its SMEs with ever-increasing tax increases as measures approved in the 2022 Finance Act a host of which kicked in January, adding to the pain of inflation that has pushed up the cost of living to a five-year high.