BMI has become slightly more cautious on the near-term outlook for the UAE new vehicle sales market. We are now targeting 3% growth for 2015, down from 5% previously, as the combination of a slowing economy in Abu Dhabi and the rising likelihood of an increase in local interest rates weighs on the market's near-term prospects slightly. That said, BMI remains broadly favourable on the medium-term outlook for the local sales, with further growth of 21.8% forecast for the 2016-19 forecast period. This should take total new vehicle sales to above the 500,000 unit mark.
At an individual emirate level, BMI remains most upbeat towards auto sales prospects within Dubai, which will record the fastest rate of growth of the seven emirates in the UAE over the next few years, as well as outperforming all Gulf countries aside from Qatar. We forecast Dubai's real GDP growth to come in at 4.6% in 2015 and 4.8% in 2016, following estimated growth of 4.4% in 2014. This expansion will be driven primarily by the tourism and construction sectors. Indeed, we remain particularly bullish on Dubai's infrastructure sector, with growth set to remain elevated in the run-up to the World Expo in 2020. This will boost demand for HCVs and related construction equipment in particular.
However, while we are bullish towards Dubai, we are becoming slightly more cautious on the outlook for Abu Dhabi, whose economy remains dominated by the hydrocarbon sector. We forecast Abu Dhabi's real GDP growth to reach 3.2% in 2015 and 3.0% in 2016, following an estimated 3.5% in 2014. This figure is below our aggregate forecast for the UAE at 4.0% in 2015 and 3.8% in 2016. However, while a slowing economy may weigh on local consumer demand for passenger cars and SUVs, we again expect good support to be given to the CV segment, as with Dubai, due to ongoing investment in infrastructure and construction. Indeed, we expect the construction sector to be a key driver of non-oil growth in the coming years. As BMI's Key Infrastructure Projects database shows, there are projects totalling over USD85bn coming online in the emirate over the next decade. This will see an average annual growth rate of 5.9% in the construction sector over the period to 2020.
Considering the UAE as a whole, the broad outlook for household spending remains positive, which underpins our medium-term positive stance towards the local auto sales market. One final encouraging factor for the autos market is the increase in migration from neighbouring states following the Arab Spring. With public transport still inadequate in Dubai, buying a car is a priority for new residents.
One threat to new vehicle sales is posed by rising domestic inflation and the rising likelihood of a hike in UAE interest rates. As well as rising price pressures (we forecast CPI to average 2.9% in 2015), our baseline view is for US interest rates to rise in H215 for the first time in more than eight years, a shift that will prompt UAE and the rest of the GCC to follow suit. We believe that the US benchmark federal funds rate will be raised to 0.50% by end-2015 and then 1.50% by end-2016, from close to zero at present. Any rise in local interest rates would likely be passed onto consumers via higher car loan rates, thereby weakening demand from those UAE residents requiring finance for a new vehicle purchase.
Turning to production, UAE-based supercar manufacturer W Motors is looking to start car production in Dubai by the start of 2016. So far, the company has launched the Lykan Hypersport hypercar. Only seven models of the Lykan Hypersport will be built, at a price tag of USD3.4mn each.
However, the company's CEO, Ralph Debbas, told Gulf Business in March 2015 that work on a UAE-based facility was ongoing, with W Motors set to launch a second supercar model, the Supersport (to be sold at around USD1.6mn) and a 4x4 model, to retail at around AED600,000. According to Debbas, this 4x4 will be 'fully produced, fully designed, in Dubai'.
Local media reports have stated that the new W Motors assembly plant will be equipped with an advanced research and development department, training area, service workshop, racing division and test track, and will be used to manufacture supercars, luxury sedans, economical cars and electrical vehicles over the long term. Initially, W Motors will only be producing around 35 cars per annum, but this may rise to over 200 cars per annum in future.
Although W Motors will only be a small-scale auto producer, it could act as a foundation stone for the establishment of a wider UAE auto production segment. Certainly, Debbas expects more automotive companies in Europe to set up manufacturing plants in Dubai, which could lead to the emirate becoming an auto production hub in the future. Debbas also plans to invest money in setting up auto design schools across the region, which could improve the skills base of the region's students. Debbas has also underlined the lower labour costs and lower cost of raw materials as reasons for establishing production operations in UAE.
One of the local companies seeking to increase its sales of electric vehicles (EVs) in UAE is local Renault/Nissan dealership Arabian Automobiles Company (AAC). In May 2015, the 7Days website reported on a number of proposals being put forward by AAC's CEO, MIchel Ayat, to the local Road and Transports Authority in order to boost the take-up of EVs in the country. These include discounts on utility bills in Dubai, free road tolls and dedicated lanes and parking spots for EVs.
Lastly, over the course of 2015, a number of auto parts suppliers have established operations in UAE, according to Messe Frankfurt, organisers of Automechanika Dubai which will take place from 2-4 June 2015 at Dubai World Trade Center. This underlines the potential for auto spare parts demand in the MENA region, which is expected to reach USD16.9bn by 2020, according to analysis by consultancy Frost & Sullivan, almost double the USD9.5bn reached in 2013.