Brazil’s President Dilma Rousseff ordered tax cuts and other stimulus measures worth about 65 billion reais ($35 billion) to protect the country’s struggling industry from what she said were “predatory” trade practices by rich nations.
As part of a package of incentives announced today to boost growth, the government will eliminate 12.1 billion reais in payroll taxes through 2013 for employers in industries hardest- hit by a surge in imports. State development bank BNDES will also expand subsidized lending, backed by a 45 billion reais injection from the Treasury. Finance Minister Guido Mantega also pledged to take more measures to weaken the currency, which has rallied 47 percent since 2005, more than all major currencies.
Latin America’s biggest economy has been struggling to cope with the currency rally, which has nearly halved the country’s trade surplus from a record $47.8 billion in May 2007. To try and reverse that trend, worsened as rich nations see their currencies weaken with interest rates near zero, Rousseff has already slapped higher tariffs on imports, raised taxes on foreign investment inflows and taken steps to boost consumption.
“We won’t hesitate to do whatever needs to be done, within our laws, to defend our companies, jobs, and growth,” Rousseff told business leaders at the presidential palace in Brasilia. “The government won’t abandon Brazil’s industry.”
The package of incentives, which also includes measures to boost government purchases of locally-made goods and tougher enforcement of trade rules, were announced after a report showed that industrial production (25:US) rose more than economists expected in February.
Output rose 1.3 percent in February, higher than 40 of 44 estimates in a Bloomberg survey of analysts whose median estimate was for a 0.6 percent expansion. Output fell 3.9 percent from a year ago, the national statistics agency said today in Rio de Janeiro.
The elimination of a 20 percent payroll tax, a longstanding demand of Brazilian employers, will go into effect in July for 15 industries including manufacturers of airplanes, computers, car parts and capital goods, Mantega said.
The measures will cost an estimated 4.9 billion reais in lost tax revenue from this year -- 7.2 billion reais in 2013 -- and will be partially compensated by a 1 percent to 2 percent tax levied on company revenues and higher taxes on imports, Mantega said.
Tax breaks to attract investment to Brazil’s car industry, which had to compete against a 30 percent surge in auto imports last year, will also be implemented. Carmakers including Daimler AG’s Mercedes-Benz and General Motors Co are among manufacturers that have ordered mandatory worker furloughs in Brazil this year as assembly lines are idled by growth that slowed to 2.7 percent last year -- less than Germany amid Europe’s debt crisis -- from 7.5 percent in 2010.
“It’s not protectionism,” Mantega said during a 56-page presentation to announce the measures, the second phase of the “Bigger Brazil” industrial policy the government announced last year. “But we can’t remain inert while other nations practice hidden protectionism.”
Jankiel Santos, chief economist at Espirito Santo Investment Bank, said that if the stimulus fails to lift industry then there’s a risk Brazil could become a more closed economy.
“When you give incentives to this segment and not to that one, at the end of the day you may create distortions,” Santos said in a phone interview from Sao Paulo. ”The measures may help a few companies, but the impact for the economy as a whole is uncertain.”
While Mantega didn’t say what currency measures the government is considering “the most important in relation to the currency aren’t the measures that we’ve already taken but rather the measures that we still are going to take.”
The real was the world’s best performing major currency in the first two months of the year, prompting the government to raise taxes on foreign loans and bonds. Since the beginning of March the currency slid 5.9 percent, the biggest devaluation amid major currencies.
The yield on interest rate future contracts maturing in January 2013, the most traded in Sao Paulo, fell one basis points to 8.86 percent at 5:59 p.m. local time. The real gained 0.4 percent to 1.8246 per U.S. dollar.
Rousseff, a technocrat who took office in January 2011, has blamed loose lending conditions in Europe and the U.S. for unleashing what she in Germany last month called a “monetary tsunami” that is fueling currency gains and a narrowing of Brazil’s trade surplus. At the same time she’s also pushed for lower borrowing costs in Brazil, whose inflation-adjusted interest rates are the second-highest in the Group of 20 nations.
“We want lower rates and spreads in Brazil,” she repeated again today.
Over the past year, the government has slapped higher tariffs on imports such as shoes, chemicals and textiles, and cracked down on customs fraud. Under pressure from automakers, Rousseff renegotiated a trade deal last month with Mexico that capped car imports for three years.
Today’s production report shows that industry may be recovering after output fell 1.5 percent in January. Eighteen of 27 sectors monitored by the statistics agency expanded output in February, led by a 13.1 percent surge in auto production during the month. Assembly of capital goods, a barometer of investment, rose 5.7 percent after plunging 16.1 percent in January.
“Whatever the comparison with the international market, Brazilian goods are expensive,” said Paulo Godoy, head of the Brazilian Association of Infrastructure and Basic Industries.
Brazilian producer are hurt by the currency, inadequate infrastructure and red tape, he said.
Still, the central bank sees the economy expanding only 3.5 percent this year and analysts surveyed by the bank see growth of only 3.2 percent. The government is targeting growth of 4.5 percent, Mantega reiterated today.
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