This quarter, BMI maintains its view that new vehicle sales growth will slow over 2015. We continue to target a still-healthy 6.5% sales growth for the current year, down from the very strong estimated 14% growth seen over 2014. A deteriorating macroeconomic picture is the main reason behind our expectation for lower new car sales growth in 2015. As one of the MENA countries most exposed to lower oil prices, it is clear that Bahrain's growth outlook has weakened since the end of last year. The retrenchment in global oil prices is putting substantial pressure on the state finances - and by implication the system of public spending underpinning the non-oil economy. Throughout the remainder of 2015 and into 2016, private sector activity will suffer from further erosion in consumer and business confidence, already weakened by the persistent uncertainty of Bahrain's political environment. That said, the impact of the oil price slump will be cushioned by macroeconomic and financial assistance from the rest of the Gulf - in the form of infrastructure funding and the purchase of Bahrain's fixed income instruments. We forecast Bahrain's economic growth slowing to a still-respectable rate of 3.4% in real terms this year and 3.3% in 2016, compared to an annualised 4.0% between 2010 and 2014.
Bahrain's dependence on hydrocarbons is pronounced. The government derives nearly 90% of its revenue from the oil and gas sector and we expect the country's budget deficit to widen to a record 10.5% of GDP this year. Bahrain has limited foreign exchange reserves and its sovereign wealth fund Mumtalakat only has assets of USD10.5bn. As such, we believe that Manama will have little option but to introduce new taxes over the coming years, while the issue of spending consolidation will loom large on the agenda. This could weigh on the prospects for passenger car and SUV sales in particular.
Turning to the near-term outlook for private consumption - a key indicator of the potential demand for new vehicles in Bahrain, we have become more negative, targeting growth of 4.5% for 2015, down from the average of 7.1% seen over the 2009-13 period. We expect the decline in oil prices to weigh negatively on consumer confidence, hitting domestic household spending. A more serious impact would come from any government action on Bahrain's generalised subsidy system, which covers a range of fuel and food products as well as power and water. While the government has been vague about its plans - and recent attempts to introduce subsidy reform have been speedily blocked by parliament - the precarious state of the public finances is likely to induce greater efforts in the coming months.
One major source of support to consumption will come from the hospitality sector, which grew by 9.9% in 2014. The tourism industry is underpinned by the continued influx of visitors from neighbouring Saudi Arabia through the King Fahd Causeway, which has seen record levels of activity: more than 9.6mn vehicles crossed the Causeway in both directions last year. Buoyant tourist arrival numbers should also indicate continued strong demand for new vehicles from the car rental market over 2015.
We also expect the Central Bank of Bahrain (CBB) to begin raising its interest rates over the second half of 2015 in line with US monetary policy, a development that could well lead to higher financing rates for car loans and thereby impact negatively on new vehicle demand over the latter part of the year.
Beyond falling oil prices, the other key risk to Bahrain's economy remains the country's troubled politics. Since 2011, Bahrain has seen constant protests and increasingly frequent incidents of violence, a reflection of the deep divisions between the Sunni-dominated Khalifa regime and the majority Shi'a population. The latest parliamentary and municipal elections, held in November 2014, were boycotted by the opposition. At the present time, we believe that Bahrain's dependence on its traditional ally Saudi Arabia will inexorably increase over the coming years, contributing to our low expectations for a successful resolution to the country's long-running stalemate between the Sunni-dominated Khalifa regime and the Shi'a opposition. Politically, Bahrain has become a key battleground of Saudi Arabia's regional conflict with Iran and the strained ties between Riyadh and Tehran will favour a continuation of the country's deadlock.
Overall, however, BMI retains a positive view on the evolution of the Bahraini new vehicle sales market. Beyond 2015, we believe that the Bahraini auto market will continue to see steady growth, in the order of just below 5% per annum on average, with total vehicle sales set to rise above the 80,000 unit mark by the end of our forecast period in 2019.
In 2014, Japanese manufacturer Toyota remained the dominant player on the Bahraini new car sales market, selling 26,481 units for a very dominant market share of 44.2%, according to information from the BestSellingCarsBlog website. Looking forward, BMI expects this dominance of the Bahraini new car sales market by Toyota to continue across 2015. This bodes well for a continued strong performance by its local distribution partner Ebrahim K. Kanoo. A Company Profile (including SWOT Analysis) for Ebrahim K Kanoo can be found in this report.
Within the luxury sub-segment, on May 2015, Euro Motors announced that its new USD30mn Jaguar Land Rover showroom will be ready by year-end. The new 5,000-square-metre two-level showroom will be located next to an existing Euro Motors showroom in Sitra. It will also include a new and used car showroom and a workshop. Speaking to Arabian Business, the managing director of Euro Motors Jaguar Land Rover, Nawaf Al Zayani, said that 'this is Euro Motors' most aggressive investment strategy in showroom development in recent years'. Al Zayani believes that this new showroom will set a new standard for other dealerships in Bahrain. In 2014, Jaguar Land Rover sales rose by 41% y-o-y, according to Euro Motors.
Euro Motors is a subsidiary of Al Zayani Investments, a company with extensive interests in the Bahraini automotive industry, with Euro Motors, First Motors and Zayani Motors in its automotive portfolio. A Company Profile on Al Zayani Investments can also be found in this report.