OUTSIDE THE RISK ZONE

The first half of this year saw a decline on the country's automobile market for the first time in three years. This trend is directly related to the ban on the importation of vehicles that do not meet the Euro 4 eco-standard, which came into force in April, and to tighter consumer lending rules. These circumstances drastically change the balance of power on the country's automobile market, clearly putting car dealerships that sell new cars in the lead.

Import promotion stage

The past decade was a milestone for the mass motorization of Azerbaijan. Despite minor downturns, in general the growth dynamics of the country's car fleet is quite impressive. If in 2003 there were slightly more than 511,000 cars in the country, by the middle of this year their number reached about 1.27m with the number of cars per 100 families increasing by 2.6 times - from 22 in 2003 to 46 in 2012. Over two thirds of vehicles are in the capital today. According to data available at the end of last year, there were more than 330 cars for every thousand residents of Baku, and in this indicator our country has come closer to the level of European countries.

It is notable that the highest rates of automobile import in recent history were recorded in the past two years. According to the State Customs Committee (SCC) of Azerbaijan, in 2012 the country imported more than 101,000 cars and spare parts worth more than 1.414bn dollars. Import volumes also increased last year, when just over 104,000 cars worth 1.435bn dollars were imported. The basis of import is certainly formed by cars.

Behind the abovementioned statistical data are many years of government efforts to increase incomes and stimulate the development of a modern car market with hundreds of authorized distributors, showrooms and service centres of well-known brands. The mass automobile boom of recent years was also furthered by a marked decline in interest rates on car loans and the formation of profile leasing and insurance services.

The level of motorization is considered worldwide to be an objective marker for determining the level of welfare. World practice also confirms that, in parallel with the increasing number of vehicles, a significant multiplier effect is almost always observed in the economy, especially in the development of small and medium-sized businesses. Numerous service centres, showrooms and spare parts stores and car washes - this is not yet a complete list of fields that are rapidly developing against the background of mass motorization. Actually, that is why, encouraging entrepreneurs to increase automobile import, the government tried for a certain period of time to ignore a number of problems associated with the compliance of used cars with environmental and safety requirements or excess risk in the individual segments of the credit market.

Stage of restrictions

However, over time these issues came to represent a visible threat to macroeconomic stability and safety of citizens. The first step towards the eradication of negative aspects on the country's automobile market was the decision adopted in 2012 to restrict the importation of cars that are not equipped with modern safety features and obsolete models of cars and the ban on the use of such cars as taxis. The significance of this decision can be assessed if we take into account that out of the more than 1.2m vehicles registered in the country, about 40 per cent belong to old models, as a rule, with a low level of safety (no airbags, bodywork protection, ABS, EBD systems, etc.). The latter is a very important point since, according to statistics, more than two-thirds of accidents that are fatal or end in severe injuries fall to cars that are not equipped with means of active and passive protection. However, this step had almost no effect on the volume of automobile imports, but only changed its structure by limiting the import of obsolete products of the Russian automobile industry.

 Two other government decisions had a far greater impact on the development of the domestic car market. In particular, we are talking about the decisions of the Central Bank of Azerbaijan to tighten the requirements for the "Rules of bank lending", which came into force at the beginning of this year. Henceforth, for issuing unsecured loans (consumer loans), banks need to obtain complete information on the customer's financial statements and credit history. First of all, it is necessary to provide information about wages and other officially confirmed income. In addition, the amount of the upfront payment when buying a car in installments (40-50 per cent for new models and 80 per cent for used cars) was increased.

The government was forced to take such tough measures primarily because of a significant increase in risks for banks due to the increasing share of bad loans. This is not surprising when you consider that in terms of car loans per capita, the country was approaching the indicators of developed countries despite the fact that the official income of the population still remains at a level lower than in European countries. This circumstance could have negative consequences in the future for both banks and the economy as a whole in the form of a borrowing payments crisis. New consumer credit rules not only reduced the risk for loans, but also contributed to the legalization of incomes.

The impact of CBA decisions on the market can be assessed if we take into account that in recent years the increasing share of automobile loans has taken first place in the total volume of consumer credits. Such services are offered by 31 of the 43 banks in the country, and they are in high demand among the population despite the still relatively high interest rates. For example, the minimum rate on auto loans in Azerbaijani banks is 14 per cent and the maximum is 26 per cent.

Reducing car loans certainly played a catalytic role in reducing the indicators of financial areas related to this field. "The decline in car sales on credit will affect the level of insurance premiums, but it is too early to say with what figures this effect will be measured," Finance Minister Samir Sarifov believes.

However, the tightening of rules had the greatest impact on the activities of car dealerships that sell new cars. "The recent changes in the field of car loans certainly had a significant impact on the automobile market, as until recently, about 60-70 per cent of cars were sold on credit," the director of the Property Market Participants public association, Ramil Osmanli, believes.

However, the effect of tighter lending rules was mixed. In particular, the decline in lending forced dealers to offer unprecedented discounts, encouraging consumers to pay most of the cost in cash. For example, from February to June of this year, most dealers offered a 10 to 15-per-cent discount, and not only for economical, but also for top models. Trying to compensate for the loss, some dealers offered various bonus programmes, additional options and accessories as a gift.

Another significant decision of the government, which drastically changed the balance of forces on the automobile market, was the introduction in Azerbaijan of the Euro-4 ecological standard, which primarily restricted the import of used cars released before 2005. These forced measures are intended to improve the environmental situation in the country, primarily by reducing the delivery of "smoky" and unsafe cars to the capital and other major cities. "The introduction of new environmental standards mainly affected the secondary market, reducing the import of used cars. However, no significant rise should be expected in prices for used cars - a huge number of old cars are used in the country," expert Osmanli believes.

The practice of recent months has shown that the dealers, which reduced the prices - mainly suppliers of economical Korean cars, very successfully compensated for the withdrawal from the market of used German and Japanese cars coming from neighbouring Georgia. Moreover, the introduction of the Euro-4 standard did not lead to a shortage of economical cars or a general rise in prices on the market.

Nevertheless, the credit and environmental constraints could not but influence the change of the supply structure, reducing the share of used cars and generally reducing imports. According to the State Customs Committee, in January-June this year, the country imported a little more than 34,300 cars, which is 28.3 per cent less than in the same period last year. If this trend continues, the annual volumes may be almost a third less than last year.

"The volume of automobile imports is falling, but the market will not be empty, since the import of vehicles is limited only in terms of the release year," - SCC Chairman Aydin Aliyev said recently. Well, the positive result of all changes made in the last two years will be a decline in the number of unsafe cars that poison the environment, which will improve the situation on our roads. With the growth in the importation of new cars, the country will receive additional investment for forming sales and service infrastructure, which will also help to create new jobs.