Subsidising car loans will boost affordability in Indonesia’s auto market, says GlobalData

Following the news that Indonesia plans to subsidise car loan as part of a debt relief program for businesses affected by COVID-19; 

Animesh Kumar, Director of Automotive Consulting at GlobalData, a leading research and consulting company, offers his view:

“Automotive industry is amongst one of the deeply impacted industries by the COVID-19 outbreak in Indonesia. Both supply and demand slumped in March and April as the country declared emergency and practised large-scale social restrictions and limitations on economic activities. The auto industry witnessed partial and complete production halts, supply chain disruptions and decline in footfalls in automotive dealerships. As per GAIKINDO, January-March 2020 automotive wholesales to dealers declined by 6.9% compared to same period year-on-year and January-March 2020 retail sales declined by 15.6% to 219,361 units.

“Amidst gloomy demand for vehicles due to COVID-19, Indonesia has offered support to the industry through the announcement of subsidising interest on auto loans. The borrowers with auto loans under Rp500m (approximately US$33,500) will be eligible for the subsidy. The subsidy will be paid for the six months between April to September 2020 with subsidised interest rate of 6% for first three months and 3% for later.

“The subsidy on interest rates is expected to boost affordability and act as a catalyst for vehicle sales in Indonesia, where more than 70% of vehicles sold annually are either financed or leased. The announcement of subsidy before Eid-al-Fitr also leads to hopes for the positive volume movements in festive season. Though the incentives may help to revive domestic sales, exports are likely to continue to remain negatively impacted. Vehicle exports, which are equally important to the automotive economy may remain impacted in absence of supply-side incentives and due to existing uncertainties in the overseas demand caused by COVID-19 pandemic.

“With contribution of approximately 13% (2019) to national GDP, automotive wholesale, retail trade and the repairs business has been a key driver for Indonesia’s economic growth. In the past, demand-side incentives and policy reforms have proved to be successful tools for reviving domestic automotive industry. For instance, in 2015, Indonesia revised vehicle down-payment requirement to purchase a vehicle from 30% to 25% for passenger vehicles and 20% for commercial vehicles and it resulted in vehicle sales rebound in 2016.

“While the industry participants expect sales to remain subdued till July 2020, it is possible that automotive industry sales will pick up as soon as the outbreak is over. In post-COVID period, due to the concerns regarding safety and hygiene, customers are likely to reduce the use of shared mobility – especially ridesharing – as well as public transportation. Customers are likely to opt for personal mobility and the sales of both new and used vehicles should pick up once the outbreak is over. Support from the government coupled with new customer outreach strategies such as ‘digital sales’ could help in quicker recovery. Hence, boosting consumer purchasing power is a step in the right direction and will drive sales growth.”

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