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Johannesburg - The economic variables in the country were making it tough for consumers, driving new vehicle sales lower and delaying the replacement of car fleets.

Steven Barker, the head of secured lending at Standard Bank, said on Wednesday that if any ratings agency downgrades caused further rand depreciation, this might result in further interest rate hikes and cause more financial strain for consumers.

Barker said the value of the rand and interest rates were already linked but he questioned whether there would be an interest rate hike as soon as there was a run on the rand, particularly a further interest rate increase had probably already been discounted by the market.

A further increase in interest rates could be prompted by a ratings agency downgrade or one bad economic figure and place consumers under more strain. This was particularly if interest rate hikes occurred in rapid succession because then consumers would not have time to adjust to the higher rates.

Ratings agencies Standard & Poor’s and Fitch will release their new sovereign ratings for South Africa on Friday, with many analysts expecting a downgrade.

Barker said the possibility of the economy going into recession would affect the sales of both passenger and commercial vehicles.

RATES IN AN UPWARD CYCLE

“There was a welcome respite last month when the Reserve Bank decided not to increase the base prime interest rate despite many predictions to the contrary, Barker said.

“However, rates are on their way up. We know the rates increase cycle is coming. It’s just a matter of time. More cautious vehicle buyers will consider this and the impact it could have on mortgages and other financial commitments. On the other hand, many buyers will stay in the market and either ‘buy down’ or look to acquire a pre-owned vehicle.”

Barker said the overall new vehicle market was expected to decline by 3 percent this year and the passenger car market by a greater percentage. Factors that might assist new vehicle sales growth included new model introductions, extended warranties and sales-incentive plans.

The key factors moderating growth in sales of new cars this year included the growth rate of the country’s gross domestic product, the disposable income of consumers and the rand exchange rate.

Nicholas Nkosi, the head of vehicle and asset finance at Standard Bank, said the financial challenges faced by most South Africans had been put in the spotlight by the 7 percent decline in new vehicle registrations in the first five months of this year, compared with the corresponding period last year.

Nkosi said history had shown that a 0.5 percentage point increase in the base interest rate resulted in car sales dropping by 2 percent.

A QUESTION OF AFFORDABILITY

“Vehicle affordability has been placed under pressure not only by the low value of the rand but domestic pressure that has included toll fees, fluctuating fuel costs and increasing vehicle maintenance costs,” Nkosi said.

“As a result, consumers looking for value in the personal car segment are opting to buy low mileage pre-owned vehicles.”

He said the average replacement time of vehicles had increased but not dramatically, while the size of deposits had dropped, residual values had steadily increased and the average term of vehicle finance agreements had lengthened.

Nkosi anticipated inflation on new vehicles this year to average 6 percent, and he stressed that prices would increase gradually to avoid them being a shock to

consumers.

THE BIG FUEL BURDEN

The average fuel cost per transaction had risen by 73 percent between January 2010 and April this year and was responsible for sharply increasing the overall cost of vehicle ownership in this period, according to Standard Bank.

David Molapo, the head of Standard Bank Fleet Management, said that fuel costs were the biggest single operating expense in fleet management and had contributed to pushing the average cost of running a vehicle to more than R4000 a month.

He said fuel price increases had resulted in the average fuel cost transaction of Standard Bank fleet customers increasing from R515 in January 2010 to R890 in April.

He quoted the example of a Volkswagen Polo 1.6 with a retail cost of R224 800, stressing that the overall cost of ownership over 48 months was R318 817.

Molapo said that of the additional costs, repayments accounted for 53 percent, fuel at 33 percent, maintenance at 12 percent and tyres at 2 percent.

He said maintenance costs had risen by about 26 percent between January 2010 and this year, with the average value of an invoice increasing from about R2 600 in 2010 to R3 600 this year.

Molapo said toll fee costs equated to about 9 percent of total fleet card expenditure countrywide, but vehicle fleets that operated largely in Gauteng would be hit even harder, with the toll bill of some companies increasing by as much as 30 percent.

He said only 59 percent of the vehicles managed by Standard Bank Fleet Management had registered for open road tolling (ORT) on the Gauteng Freeway Improvement Project, but confirmed that registering for ORT might not be applicable for some company vehicles because they were in other provinces and not being driven in Gauteng.

“There are a lot of people who don’t want to pay it, but larger companies say they will do the right thing and be done with it,” he said.

Molapo said that vehicle maintenance costs were challenging to control but stressed that well-maintained vehicles positively impacted on vehicle productivity, fuel consumption and vehicle resale values.

He said fuel was a critical fleet expense and also critical to manage and control because fuel prices increase had a major impact on fleet cost.

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