ECONOMYNEXT – Sri Lanka’s vehicle registrations hit an all-time high of 63,687 in September 2015 with cars surging to 14,301 units from 9,107 units in August, as credit and import controls were slapped by authorities, an analysis of vehicle registry data shows.
Maruti/Suzuki vehicles led the charge, surging to 7,789 unit in September from 4,259 units in August and 1,363 units in January, an analysis of Sri Lanka’s vehicle registry data by JB Securities, a Colombo-based equities brokerage showed.
Hybrid High
Hybrid vehicle registrations which fell from a peak of 4,320 unit in January 2015 following a tax cut recovered to 5,049 units in September driven by a surge in Suzuki Wagon R units to 1,637 in September from just eight units in January.
Registrations of Maruti Alto, Sri Lanka’s best-selling car, rose to 7,337 units in September from 3,647 units in August.
JB Securities said some of the Maruti vehicles were being bought by families with state employees who had sudden salary increases.
Unlike hybrid cars, which are owned by more affluent customers, and are found in traffic jams in Colombo, Maruti vehicles are hardly seen, except outside Colombo and on weekends.
Sri Lanka’s consumption, credit and imports have surged as the Central Bank failed to tighten policy as a budget deficit deteriorated with state salary increases. Instead, the bank has cut policy rates and printed tens of billions and generated a balance of payments crisis.
The rate cut in April also triggered capital flight from debt markets, adding fuel to the fire, which was kept burning with a steady release of liquidity to make banks give loans beyond their ability to raise immediate funds, critics have said.
Car imports have been an overt symptom of the underlying expansion in state and private credit.
Over the past month authorities have slapped a series of administrative, trade and credit controls on car imports, while ratcheting up monetization of debt and attempting to float the currency.
Trade controls on cars were imposed in the form of 100 percent margin on import letters of credit, as authorities have done in the past after generating a balance of payments crisis.
Loan-to-value margins were initially reduced to 70 percent, in a bid to limit credit to buy cars, mimicking ah hoc administrative controls followed in centrally planned economies.
It was later relaxed to 90 percent after lenders said financing of second hard cars were also hit by the move.
While reducing the loan-to-value ratio has had some prudential value, in terms of collateral cover if applied consistently across time. They come as banks are being urged to give un-collateralized loans based on cashflow analysis.
Lending on enhanced state-worker salaries would be a ‘good’ banking practice, analysts say.
Printing money, pushing credit and then slapping administrative controls on specific sectors that rulers and bureaucrats consider ‘unsuitable’ or ‘low priority’ is a standard central planning tactic, where an all-knowing state tries to second guess citizens’ decisions on optimal uses of money.
Announcement Effect
The September surge in car registrations could be an ‘announcement effect’, as market participants rush to beat a specific control or anticipated further ad hoc controls, including credit, taxes or currency depreciation.
In July there were signs that car demand was slowing.
Central banks in third world and other emerging markets usually try to put controls on housing, or commercial property or whatever sector that is in vogue in a credit cycle after firing bubbles by delaying interest rate adjustments.
Ad hoc and selective administrative controls and moral suasion have been abandoned in many ‘free countries’ where monetary authorities also print money and fire bubbles but have learned hard lessons.
In the past Sri Lanka has put controls on so-called ‘luxury goods’ which are simple labour saving appliances or engaged in rationing, especially of oil.
In the past, the authorities have blamed oil imports on balance of payment troubles, after printing money – usually to give oil subsidies – and firing credit and consumption. (Colombo/Oct11/2015)