Brazil moves to boost car industry

Brazil has launched a stimulus package worth more than $10bn to revive its struggling automotive industry and help return the stagnating economy to its former impressive levels of growth.

Guido Mantega, the country’s finance minister, announced late on Monday a reduction in the IPI industrial tax on vehicles and IOF tax for individual borrowers, as well as easier terms for car financing.

BNDES, Brazil’s state development bank, also agreed to lower interest rates for some machinery and industrial equipment.

“It’s an unprecedented initiative that will benefit both consumers and investors,” Mr Mantega said. “The (measures) are the result of a commitment made by the government, the industrial sector and the financial sector … to reduce the cost of products and facilitate the financing of products,” he said.

After stunning investors with gross domestic product growth of 7.5 per cent in 2010, Brazil’s economy expanded only 2.7 per cent last year, lower than any of the so-called Brics group (Brazil, Russia, India and China) and even some developed countries such as Germany.

The economy has struggled to eke out any growth since then, with data on Friday showing economic output in the country fell for a third straight month in March, contracting 0.35 per cent from February.

Sales in Brazil’s key car industry have fallen particularly sharply as rising defaults have prompted banks to restrict credit, pushing stock build-ups to their highest levels since the onset of the financial crisis in 2008.

Vehicle sales fell 14.2 per cent in April from March, according to the national automakers’ association Anfavea.

Mr Mantega said on Monday that the IPI tax on eligible smaller cars would be cut to zero from 7 per cent until the end of August this year, while the levy on larger vehicles would also be reduced.

He added that the central bank would reduce reserve requirements for car loans, freeing up about R$18bn ($8.8bn), allowing private and state-run banks to boost lending in the sector and lower borrowing rates.

The government also reduced the IOF transactions tax for individual borrowers to 1.5 per cent from 2.5 per cent previously.

The measures, which Mr Mantega said would cost the government about R$2.1bn ($1bn) in lost tax revenue, come as emerging economies from India to China are also struggling with slowing growth amid uncertainties over the eurozone debt crisis.

Over the weekend Wen Jiabao, China’s premier, indicated that he would take more steps to boost Chinese growth.

However, economists point out that in Brazil’s so-called “two-speed” economy the government needed to do more to stimulate output rather than consumer demand, which remains relatively strong thanks to record-low unemployment.

In particular, critics say infrastructure improvements and wider reforms in the labyrinthine tax system are needed to boost the competitiveness of Brazilian industry.

“Differing interests have stopped an agreement being made at the federal level to promote any type of effective tax reform,” said Fernando Zilveti, professor of finance at the business school of Brazil’s Fundação Getulio Vargas. “For an economy that was only recently tipped as one ofthe best on the continent, it’s dangerous to disappoint expectations.”


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