Venezuela may be the only country in the world where a new car becomes more expensive the instant it's driven off the dealership lot. Ariana Cubillos / AP Photo
Venezuela may be the only country in the world where a new car becomes more expensive the instant it's driven off the dealership lot. Ariana Cubillos / AP Photo

Used cars cost more than new ones in Venezuela



CARACAS // Venezuela may be the only country in the world where a new car becomes more expensive the instant it is driven out of the dealership.

Buying a used 2012 Ford Explorer SUV means coughing up 1.2 million bolivars, the equivalent of about US$60,000 (Dh220,000) at the street exchange rate and double the cost of a new car, according to the country's leading used-car website. Late-model used Jeeps and Ford Fiestas also cost double the price of what a new model would cost.

The anomaly, many economists say, is the result of President Hugo Chavez's socialist-orientated controls, which have turned this country's economy upside-down and already produced shortages of basic supplies such as sugar and cornmeal. The policies have dried up the inventory of new cars, and Venezuelans who manage to buy one often resell it quickly at a profit.

For people such as bank manager Luis Villamivar, that has transformed auto shopping into an odyssey.

"It's frustrating. I have the money I need to buy one, but there are no cars available," said Mr Villamivar, who has been hunting for a car for more than five months.

Even as the country sits on the biggest proven oil reserves in the world, its auto market has been rocked by a snowballing of government restrictions and their unintended consequences.

Trying to stem capital flight, Mr Chavez's government has for the past decade maintained currency exchange controls, which have made buying dollars difficult and produced a black market where much higher rates are paid for greenbacks. At the same time, the government has cut back on US currency being sold through an official exchange agency to businesses, creating a shortage of dollars available for imports.

As a result, fewer autos are rolling off ships at the country's ports. And production at auto assembly plants in Venezuela has dropped, worsening the shortages and pushing used-car prices even higher.

The currency shortages have also fuelled inflation, topping an annual rate of 20 per cent, but dealers have been reluctant to raise their prices too much for fear of being accused by government officials of price speculation, which might jeopardise their access to cheap dollars through the official exchange. Inflation has raised demand further, as many Venezuelans buy cars, as well as apartments and appliances, as an investment to prevent their savings from being eroded by inflation.

Russell Dallen, a securities trader at Caracas Capital Markets, predicted an official devaluation that took effect last Wednesday would spur even greater demand for cars as people try harder to shield their earnings from inflation.

"Clearly, the prices will go up and the waiting lists for new cars will continue to get longer," he said.

Pro-Chavez lawmakers have introduced a bill aimed at controlling both new and used auto prices while accusing many car dealerships of price speculation.

"There are numerous mafias that must be eradicated," said congressman Elvis Amoroso, who introduced the bill. "There are irregularities among the plants and the dealerships, and in the end it's the consumer who must pay exorbitant prices who is the loser."

Steve H Hanke, a professor of applied economics at Johns Hopkins University in Baltimore, warned that trying to control prices was likely to worsen the shortages.

"They can establish price controls, but if they are below the free-market price, there will be more shortages," Mr Hanke said.

Mr Villamivar had his heart set on an SUV and spent hours visiting showrooms, travelling by bus and hitching rides with friends to check dealerships in other cities.

Everywhere he went, sales managers told him they did not have any vehicles in stock, although some said they would put his name at the top of their waiting lists if he paid them. He refused.

"This is like dealing with the mafia," Mr Villamivar complained as he left a dealership with no cars and not even place on a waiting list.

Car imports have been dropping since November 2007, when the government restricted the amount of dollars distributed to importers in an attempt to increase production at local assembly plants.

A year after the restriction was established, Venezuela imported 135,499 vehicles, down 59.7 per cent from 2007, according to the Venezuelan Automobile Chamber. The country imported just 17,680 vehicles in 2011 and 25,296 last year.

Domestic production has also declined, from 172,418 vehicles in 2007 to fewer than 105,000 vehicles last year, said the auto chamber. Manufacturers with plants in Venezuela include Ford, Toyota and Mitsubishi, as well as Chinese newcomer Chery.

For an auto dealer, negotiating the country's unusual currency exchange rules means applying to a government commission for an allotment of dollars to buy cars at the official exchange rate of 6.3 bolivars to the dollar. If the dealership receives only a portion of the dollars it requests, the owner can stock fewer cars or turn to the black market, where dollars cost more than three times as much in Venezuelan currency.

The result is list prices for new vehicles that, if calculated at the official rate, seem astoundingly high. For instance, a new Toyota Fortuner SUV was recently advertised with a dealership price tag of approximately 530,000 bolivars, the equivalent of more than $84,000 at the official exchange rate. Calculated at the black market rate, that price comes in at less than $27,000.

The high sticker prices are offset to some degree by government subsidies of the world's lowest petrol prices, equivalent to 1 US cent per litre.

Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
 
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
 
Round 3: February 7-9, Dubai Autodrome – Dubai
 
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
 
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia

As You Were

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”