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Is the weak peso accelerating the purchase of new cars?

Is the weak peso accelerating the purchase of new cars?

By Alden M. Monzon

The sales of automotive vehicles in the Philippines have been steadily increasing this year for six consecutive months since March, growing at an average of around 40 percent. A sharp upward spike was seen last August, where sales doubled and grew to an equivalent of 90 percent.

On another economic front, the Philippine peso depreciated and breached the ₱54-per-dollar mark back in June, two months before that recorded spike in vehicle sales.

By the middle of the second week of July, the peso was already trading at ₱56 against the greenback. It depreciated further to ₱58.50 per $1 as of September 23.

The growth in vehicle sales during the months of June and July, at 26.8 percent and 29.4 percent respectively, and the depreciation of the peso seem to be interlinked, at least according to one of the industry leaders in the local automotive scene.

The possible reason? Inflation hedging.

Federation of Automotive Industries of the Philippines (FAIP) President Vicente Mills offered this explanation to the phenomenon of why vehicle sales continue to climb despite the weakening of the peso.

“This is part of inflation hedging. People who already had the budget to buy are accelerating their purchases and buying (now),” Mills said on Monday, saying that this trend applies to both corporate, as well as commercial purchases of vehicles.

He explained that individuals who had plans to buy, upgrade or dispose of old vehicle models started and will continue to buy as an inflation hedge.

“They are expecting prices to go up in the future because of this (weakening of the peso),” said the FAIP official.

Inflation hedging is often used by investors to anticipate a drop in currency to protect their assets. In this case, it manifested in people buying ahead of time which they think will see the peso depreciating much further.

“I think this accelerated purchasing will mean sales after this wave of inflation hedging will (be impacted) in the near future unless the economy really picks up,” Mills warned, implying that the Philippine automotive industry may see a similar spike which is directed down instead sometime next year.

Philippine Chamber of Commerce and Industry (PCCI) George Barcelon said the continued weakening of the peso is affecting the manufacturing operations of carmakers in the country due to increased costs of importation.

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“It is definitely causing the price of car parts to go higher. These companies are using U.S. dollars for import (purchases),” Barcelon said, adding that maintenance and repair costs are also projected to go up if the depreciation of the local currency continues.

“All of those are part of the maintenance. And the maintenance and repair costs can go as high as 15 percent of their revenues,” he said further.

The PCCI official added that the financing costs may also go up as well, since the average Filipino purchases cars through some type of bank financing or lending services.

Mill, expressed similar sentiments of the effect of the peso depreciation to import activities, and hence on manufacturing costs, highlighting that a huge segment of the local vehicle manufacturing industry relies on bringing materials or even whole units from overseas.

“Most of the automotive industry now, except for a few companies, are importing completely built-up units. So, the impact of that is direct to the whole unit. The companies that are assembling are adding substantial local materials to their products,” the FAIP official noted, citing major components such as steel, sheets and engines coming from abroad.