Will MCO 2.0 Derail Malaysia’s Vehicle Sales Momentum?

Vehicle sales showed a strong rebound in 2020 especially after the lockdown period ended with the last quarter numbers even exceeded analyst expectation. The uptake was largely attributed to pent up demand and special government initiatives including the waiver of Sales and Service Tax. With another lockdown introduced this year, would MCO 2.0 derail vehicle sales forecast and dampen the momentum felt at the tail end of the year before, Fitch Solutions an affiliate of Fitch Ratings doesn’t think so.

Under the new restrictions, individuals are only permitted to leave their homes under emergency circumstances and companies are allowed only 30% of their workforce in physical office locations, while only essential services will be permitted to resume operations. This means brick-and-mortar automotive retail operations are not allowed to operate. This will no doubt impact demand for new vehicles the agency iterated, the forecast was initially based on 2 weeks but was adjusted to consider longer duration, however it still maintains a 6.9% increase in total vehicle sales for 2021, on the back of 2020 estimate of a 15% decline. This was also result in 2021 sales remaining below their 2019 pre-pandemic levels, reaching just under 550,000 units (see chart below).

Fitch expects sales to take a hit for the duration of the movement restrictions with sales improving as movement restrictions ease. The expectation for the vaccine rollout set to begin in February 2021 will support the views as sentiment levels improve from consumers and businesses leading to a resumption in vehicle purchases.

Further supporting the forecast, in January 2021, the Malaysian finance ministry extended the sales tax exemption on new vehicle sales, introduced in July 2020, to June 2021. In April 2020 vehicle sales declined by 99.4% m-o-m as only 141 vehicles were sold in that month when dealers were closed, followed by a sharp 16,164% increase in May 2020 as the Conditional MCO was introduced permitting retailers to resume operations. In June 2020 the momentum in the sales recovery was sustained as sales posted a 94% increase m-o-m due to improving consumer and business sentiment as movement restrictions eased. This was followed by the introduction of tax exemptions in July 2020 when sales posted a 28.8% m-o-m increase ensuring that the positive momentum in sales was sustained.

Completely Knocked Down (CKD) vehicles are granted a 100% reduction in the sales taxes on new vehicles, which
normally stands at 10%, for both imported and locally assembled vehicles, while Completely Built-Up (CBU) vehicles will be eligible for a 50% sales tax exemption. When the sales tax exemption was first introduced in June 2018, vehicle sales increased by 50.1% on a m-o-m basis further highlighting the importance this policy measure has had in stimulating demand for vehicles in the past. This leads to expecting sales to follow a similar path in 2021 as that observed in the months after the gradual easing of restrictions in May2020

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