KARACHI: Pakistan’s auto sector, already facing many challenges, is about to confront another negative event in the wake of JPY appreciation against USD, as this would directly impact margins of the auto assemblers including Pak Suzuki Motor Company (PSMC), Honda Cars (HCAR) and Indus Motor Company (IMC).

Post indication of several global surveys of a potential economic slowdown mainly in Europe and China, JPY has strengthened by 2.0 percent against USD and 14 percent against PKR in the fiscal year so far, since investors sought exposure in safe haven ‘JPY’.

An analyst at BIPL Securities said higher input cost owing to adverse movement in currencies and lower ability to pass on the impact would keep the margins of the auto assemblers under pressure. Additionally, restriction on the purchase of vehicle by non – filers, rising borrowing costs, decelerating GDP growth rate and rising cost of vehicles would inhibit the demand for autos in 2019 .

Explaining reasons for JPY appreciation, BIPL Securities notes that deterioration in global macros, US – China trade war, Brexit uncertainty and political turmoil in the Euro-zone have restrained the risk appetite of investors, leading many of them to transfer their investments in safe haven investments.

Moreover, JPY has widely been used in carry trades owing to lower yields in the country. However, during periods of uncertain global economic outlook investors become risk averse and square their carry trade positions to repay their borrowed sum, resultantly this behavior leads to JPY appreciation.

Further, US Fed revised down its GDP growth rate estimate from 2.5 percent to 2.3 percent for 2019 and forecasted interest rate hikes twice over the same period instead of previous estimate of three times. However, as per the international agencies, the US Fed may not be able to further increase the discount rates, as it may further put the economic activity under pressure. This uncertainty is also inducing the investors to opt for currencies like JPY.

Analysts expect it will be difficult for the domestic players to pass on the impact of appreciating JPY to consumers owing to eroding purchasing power of the consumers in the backdrop of deteriorating macros.

Gross margins of local original equipment manufacturers (OEMs) including Pak Suzuki Motor Company (PSMC), Honda Cars (HCAR) and Indus Motor Company (IMC), heavily dependent on JPY denominated CKD imports, closely follow movement in the foreign exchange markets, thereby, impacting them negatively.

Stark appreciation in JPY also presents a minor risk of one‐off exchange losses for the industry, with Pak Suzuki Motor Company (PSMC) being the major loser.

Pak Suzuki Motor Company (PSMC) is always at a disadvantage if any adverse movement in JPY-PKR rate due to a relatively higher exposure to the currency despite overall higher localization levels compared to peers.

As per September 2018 quarterly accounts, auto players including Pak Suzuki Motor Company (PSMC), Honda Cars (HCAR), Indus Motor Company (IMC) witnessed 27.1 percent decline in profitability, primarily coming from 21.7 percent decline in gross profit.

Recent PKR devaluation may force the companies to further increase the prices, however, worsening macros create a question on their ability.