Futuregrowth, Old Mutual’s institutional bond investor, has warned that if fuel prices remain elevated and the South African Reserve Bank starts raising interest rates, consumers’ disposable income will be squeezed, weighing on new vehicle sales.
New vehicle sales in South Africa are coming off a record-breaking year. Sales surged 17.3% year on year in March, with units sold reaching their highest level for that month since 2007.
However, the breakout of war in the Middle East, which fuelled a surge in oil prices, has dampened consumer outlook, with the Reserve Bank expected to hike interest rates by 25 basis points at the monetary policy meeting in May.
Futuregrowth — which marshals more than R200bn in assets— said in a note the easing of interest rates over the past two years had aided car sales, broadening the pool of qualifying borrowers, and reducing repayment stress on existing loan holders.
The company noted, however, that heightened geopolitical tensions, including the recent escalation in the US-Iran conflict, have added further uncertainty through potential disruption to global supply chains, upward pressure on oil prices and, consequently, renewed inflationary risk.
“Within the domestic auto finance universe, sensitivity to these pressures is uneven. Retail-focused loan books such as those of TFSSA [Toyota Financial Services SA] and MBSA [Mercedes-Benz SA] are more exposed to household affordability dynamics,” said Simphiwe Mehlomakulu, debt capital markets analyst at Futuregrowth.
The likes of Citi and Bank of America have already pencilled in an interest rate hike as early as this month, as fuel and transport costs feed into broader inflation pressures and threaten to de-anchor expectations
“Sustained increases in fuel costs and the risk of renewed rate hikes could erode disposable income, unwind some of the affordability gains delivered by the recent easing cycle and place pressure on newly originated loans. By contrast, DTSA [Daimler Trucks Southern Africa] and SFSA’s [Scania Finance Southern Africa] corporate-focused borrowers are supported by the revenue-generating nature of commercial vehicles.
“That said, fuel remains a significant operating cost for transport operators, and persistently elevated diesel prices could compress margins, specifically for smaller owner-operators with limited balance sheet flexibility, potentially delaying fleet replacement or expansion.”
The likes of Citi and Bank of America have already pencilled in an interest rate hike as early as this month, as fuel and transport costs feed into broader inflation pressures and threaten to de-anchor expectations.
Economists largely expect rising oil prices will likely push headline inflation above 4% from May — outside the new inflation target of the Reserve Bank of 3%, with a tolerance band of 1 percentage point on either side of 3%.
Futuregrowth has noted that since 2022, the South African vehicle market has undergone a structural shift in consumer behaviour. “Households have increasingly been substituting premium or mid-range vehicles for more affordable alternatives. This has included a shift from new to used vehicles, as well as a growing uptake of competitively priced Chinese and Indian brands offering comparable specifications at significantly lower price points,” Mehlomakulu said.
“A defining structural feature of South Africa’s vehicle market is its export orientation. While the country manufactures vehicles primarily for export to Europe and the US, the domestic market is dominated by imports from markets such as India and China.
“The import share reflects production location rather than brand ownership, with locally manufactured vehicles classified as domestic. As a result, demand for high-volume models produced in South Africa by global original equipment manufacturers (OEMs) like Toyota is excluded from the import figure.”
The Futuregrowth data shows major automobile manufacturers continue to tap the South African debt capital market for funding.
In this regard, key issuers in the debt capital market are TFSSA, DTSA, Scania Finance Southern Africa and Mercedes-Benz SA. “These entities act as the primary conduit through which institutional investors gain exposure to South African vehicle credit, issuing senior, unsecured notes under [DMTN] programmes listed on the JSE,” Mehlomakulu said.
“Auto finance subsidiaries provide vehicle financing, insurance and fleet management services linked to their parent OEM brands, representing the financial services dimension of the automotive investment case rather than direct manufacturing exposure.”
Business Times
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