KUALA LUMPUR, 15 Feb — Passenger car sales in Malaysia will grow 2.2 per cent  in 2018 on the back of the country’s strong economic outlook and a strengthening local currency.

However according to BMI Research, a unit of Fitch Rating, a rise in interest rates and stringent lending conditions will continue to drag on growth in the new car market.

After flat growth of just 0.02 per cent in 2017, it expects passenger car demand in Malaysia to trend higher in 2018, rising 2.2 per cent and totalling around 526,000 units.

Its Country Risk team forecasts real GDP growth of 5.5 per cent for Malaysia in 2018 supported by higher oil prices and strong domestic demand.

In turn, this favourable economic growth will lead to improvements in the job market reflected in the Country Risk teams forecast for Malaysia’s unemployment rate to average 3.0 per cent in 2018, down from an estimated 3.3 per cent in 2017.

BMI Research said that this will provide a boost to consumer sentiment in the country, which remains below the 100-point threshold, marking a broader optimism in the economy and in turn buoying consumer spending.

Its Country Risk team forecasts the ringgit to average RM4.00/USD in 2018, up from an estimated average of RM4.25/USD in 2017 and representing an average appreciation of 5.9 per cent.  

As the local currency strengthens,  it  expects the prices of imported vehicles and components used in domestic car manufacturing to ease, which can be passed down to consumers in the form of lower retail prices for new vehicles.

While inflation is expected to remain within the central bank’s target range of 3.0-4.0 per cent, rising oil prices and a likely uptick in spending due to general elections in 2018 will present upside inflationary pressures. Headline inflation came in at 3.5 per cent in December 2017 and 3.4 per cent  in November 2017, largely driven by higher food and fuel prices.

BMI Research’s Oil and Gas team forecasts Brent to average US$65.0/bbl in 2018, picking up considerably from an estimated US$54.75/bbl in 2017, which will likely lead to higher fuel prices over the coming months.

In turn, as fuel prices rise considerably higher in 2018, its Country Risk team forecasts the country’s inflation rate to average 3.2 per cent. It believes that rising inflationary pressures, particularly fuel, will negatively impact consumer disposable incomes and present headwinds to growth in new vehicle purchases.

BMI Research expects interest rates to firm to 3.5 per cent in 2018.  

This will make the costs of borrowing more expensive and act as a drag on auto loan demand.

The research outfit opines that tight lending conditions will continue to constrain growth in auto sales by limiting consumers’ ability to gain financing for new vehicle purchases.

Banks in Malaysia have tightened lending conditions, shortening the hire purchase repayment period to a maximum of seven years, down from the previous nine-year repayment period.

In 2017, loan applications for the purchase of passenger cars totalled RM77.6 billion, down 1.3 per cent, while loan approvals for the same purpose increased only by a weak 2.0 per cent totalling RM41 billion, indicating the negative impact that tighter lending conditions are having on consumers’ ability to gain access to vehicle financing.