Bankrolling mobility --[Reported by Umva mag]

It’s been proven that auto sales recovery cannot happen without financing

AS THE PHILIPPINES journeys toward motorization, there are a few necessary enablers to allow it to take its natural course. For one, we need more roads. This will mitigate traffic especially in metropolitan areas where, for now, private vehicles are a necessary substitute for a much needed and more progressive public transport system.

Speaking of roads, economic growth is also hugely dependent on a more efficient farm-to-market road system that cuts down on excessive downtime and losses to gross domestic product (GDP). In fact, early this year, the Management Association of the Philippines (MAP) called on the government to declare a “state of calamity” in Metro Manila due to alarming traffic conditions that cost the economy an estimated P3.5 billion a day. In a study, the Asian Development Bank (ADB) projected this loss to rise to P5.4 billion a day if nothing is done to address the problem.

Another enabler of motorization will be a robust secondary market. At the moment, the used-car market is highly fragmented and unregulated. As with most other markets — the stock market, the art market, the commodities market — a developed secondary market assures that products can be re-traded with full transparency, protection for buyers and sellers, quality assurance, and fair market valuation. Currently, it is estimated that the pre-owned car market is about 1.5 times bigger than the new-car market. It needs to be organized.

Thirdly, there must be a corresponding increase in land transport management systems to assure that the vehicle population conforms to safety, environmental, and other performance standards as prescribed by the government. This also includes the implementation of a more robust and modern traffic management system that assures discipline and order on the roads.

There are a few more worth mentioning but I believe that one of the most critical enablers is the availability of, and access to, consumer loan financing.

FINANCING MOBILITY
Ken Research recently published a study that looked at the state of the Philippine auto finance market. It cited that, in 2022, the market reached US$23.2 billion. Seventy percent was accounted for by new car loans, 20% by used cars, and 10% by refinancing options. It went on to predict that this would double to US$51.6 billion in 2027 with a CAGR of 10.2%, on the back of a rising middle class and a growing appetite for financing solutions.

It will be remembered that the Philippines is a very young population with a median age of 25.3 years, compared to 39.7 in Thailand, 32.4 in Vietnam, 30.1 in Malaysia and 29.8 in Indonesia. We also have the second-largest population in Southeast Asia with 115 million. These numbers foretell a very significant demographic bonus. In fact, the National Economic and Development Authority (NEDA) recognizes that the country is in a demographic sweet spot where more Filipinos are entering the labor force than are being born. In an economy where 70% of GDP is driven by personal consumption, this is a very vital indicator.

The importance of financing to motorization and the growth of the Philippine auto market was very clearly underscored during the COVID-19 years of 2020 to 2022. From 2011 to 2017, compounded annual sales growth for cars was around 18%. To a large extent, banks and financing companies were major drivers of that growth. During the pandemic, financial institutions fled the auto finance market due to a surge in loan defaults and a need to secure their financial soundness in light of the uncertainties. Auto sales plummeted in part to a slump in demand but also due to the absence of consumer loans.

Toyota Motor Philippines (TMP) was, fortunately, able to mitigate the impact of the crash in auto sales due to its partnership with Toyota Financial Services Philippines (TFSPH), its captive financing arm. TFSPH continued to underwrite financial leases during COVID, allowing TMP to cater to the essential mobility needs of Filipinos.

It was generally acknowledged by auto industry players that there would be no recovery in auto sales without the return of financing. And this proved true. As banks and financing companies consolidated their portfolios, their appetite for consumer lending returned. This has led to the strong resurgence of auto sales in 2022 and 2023. A study by AMRO-Asia showed that motor vehicle loans resumed in Q1 of 2022 and have continuously risen since then. This year, the auto market is tracking sales growth of around 10% resulting from more aggressive auto loans from all the major financial institutions. In fact, it will be noted that financing promotions have become more prominent of late.

A fair estimate of financed sales to total motor vehicle sales is about 60% to 70%. This makes it a major predictor of auto sales growth. I see that this trend will remain strong for a number of reasons. As our young population enters the labor force, consumption is expected to rise and this will likely be financed. One reason is that the banked population in the country is expected to rise and this will increase their credit worthiness. Another reason is that more financing solutions are entering the market, including operating leases. Notably, the youth is generally more open-minded to taking on more credit.

A study by TransUnion showed Gen Z as a growing contributor to credit card originations. The percentage share of overall originations among the Gen Z has more than doubled in the last five years — from one in 10 (9%) in 2019 to one in five (20%) in 2023. They also made up 33% of the new-to-card segment of borrowers in 2023. Ninety-eight percent of Gen Z Filipinos see access to credit and lending products as vital to achieving their financial goals.

Another factor that will drive the importance of credit is the transition of the Philippine economy into an upper middle-income economy. The gross net income (GNI) per capita of the Philippines was reported at US$4,230 in 2023, higher than the US$3,950 reported in 2022. If the economy sustains its 6% GDP growth, the country may reach the upper middle income threshold of US$4,515 by around 2026. This will increase the credit ratings of Filipinos in general.

Filipinos tend to be more cautious and conservative when it comes to borrowing. The country’s household debt ratio of only 12.6% is the lowest in Asia. In Thailand, this ratio is 91.6% while in Vietnam, it is 25.6%. The runway for credit growth is still significant and the fortunes of the auto sales are interminably linked to this.

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