New car sales plunged a fifth in 2017

New car sales in Kenya dropped 20.78 percent last year, hit by a sluggish economy, a prolonged presidential election and an interest rate cap, the umbrella body for the industry said on Wednesday.

Global carmakers such as Volkswagen have been investing in car assembly in the East African nation in recent years, attracted by its long term economic growth prospects and its strategic location as a hub for the region.

The industry sold 10,722 vehicles last year, down from 13, 535 in the previous year, said Rita Kavashe, the chair of the Kenya Vehicle Manufacturers Association.

“It is just the poor performance of the economy for quite a bit of last year (that contributed to the decline),” she told Reuters.

Economic growth was 4.4 percent in the third quarter of last year, the slowest quarterly pace since 2013, as the country was hit by political uncertainty after the Supreme Court nullified the initial presidential vote.

A cap on commercial interest rates, imposed by the government in 2016, also hurt sales after banks shunned lending to small and medium enterprises, which were deemed too risky after the cap.

“Accessing credit was a big challenge last year. It was the main driver of the decline,” Kavashe said.

Before the rate cap kicked in and squeezed credit growth, Kenya’s new car industry had its best year in 2015, when 20,000 units were sold.

Kavashe said sales were likely to rebound towards 2016 levels this year as consumers who held off vehicle purchases in the fourth quarter, due to the uncertainty, now buy them.

Kenya’s car market is dominated by cheaper second-hand imports from countries such as Japan, which account for 89 percent of annual sales.

Vehicle manufacturers have, however, been investing in Kenya recent years, to take advantage of growing demand for newer, environmentally friendly vehicles.

Volkswagen said it would double its Kenyan production earlier this month. Other companies that have announced plans to start or restart assembly in Kenya in the past two years include Peugeot and Volvo.

Isuzu also increased its local presence last year by buying a 57.7 percent stake from General Motors in GM’s Kenyan franchise.

“Long term, Kenya is still very good, we just had a difficult period, but that will correct,” Kavashe said.