Tax

Brazil tax cuts, credits throw lifeline to industry

Reuters News
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Posted: Apr 03, 2012 3:22 PM
Brazil tax cuts, credits throw lifeline to industry

By Alonso Soto and Luciana Otoni

BRASILIA (Reuters) - Brazil's government unveiled a new package of tax cuts, low-cost credits and other relief for ailing industries on Tuesday, seeking to resurrect a once-booming economy struggling to regain momentum.

In a speech to business leaders in the capital, Brasilia, President Dilma Rousseff said the measures are necessary to revive Latin America's biggest economy and help Brazil defend itself against what she called "predatory competition" from low-cost rivals in the global marketplace.

The measures were announced the same day that fresh data showed signs of life in Brazilian industry after a prolonged slump. Analysts, though, cautioned that the latest policies fail to tackle the overall tax burdens, heavy bureaucracy and lack of investment that have long held back Brazil.

Since the global slowdown brought Brazil's economy to a near-standstill late last year, policymakers have been taking incremental steps to revive it. But after five consecutive interest-rate cuts, a rise in import taxes on cars, and a series of measures designed to curb the appreciation of Brazil's currency, a recovery is far from clear.

Critics in recent months have blasted the Rousseff administration for policies increasingly seen as protectionist.

But Rousseff on Tuesday put the blame at the feet of developed countries, where the financial crisis originated, and big exporters like China and the United States, whose currencies she has long argued remain artificially weak and unfairly competitive against the Brazilian real.

"We will not hesitate," she said, "to do what we must to defend our jobs, our industry and our growth."

The government said it will cut payroll taxes to spur hiring in sectors as varied as textiles and plastics to the automotive industry. Together, the tax cuts represent about 10 billion reais ($5.5 billion) annually in forgone public revenue, part of which the government will seek to recover with tax increases on products such as alcohol and tobacco.

The government will also stimulate domestic industry through government purchases and inject 45 billion reais ($24.6 billion) into the coffers of state development bank BNDES, which provides subsidized loans for Brazilian companies and is the main source of long-term financing in Brazil, especially for much-needed infrastructure projects.

FOREX MEASURES IN THE PIPELINE

The moves are the second such stimulus package for ailing Brazilian industries since the country's previously red-hot economy began to cool in mid-2011, hit by fallout from Europe's sovereign debt crisis and slower growth in China, Brazil's biggest trade partner.

Finance Minister Guido Mantega, who unveiled the measures before Rousseff and other government officials, said Brazil would also continue to enforce recent measures aimed at preventing the real from strengthening further.

While the moves to raise taxes on certain financial transactions and speculative capital have curtailed the currency's rally in recent months, the real is still about 30 percent stronger than at the depths of the 2008 financial crisis.

The currency firmed after Mantega's comments, in which he said the recent retreat by the currency had put the real back at a "reasonable" level. The real gained 0.3 percent on Tuesday trade to 1.8250 to the dollar.

After growth of 7.5 percent in 2010, Brazil's economy nearly screeched to a halt late last year, posting a full-year gain of just 2.7 percent - far less than originally predicted. The government hopes the new measures will help it reach its projection for growth of as much as 4.5 percent in 2012.

Though welcomed by Brazilian industry as helpful, the package was criticized by economists and business leaders as falling far short of the true reforms necessary to help unburden Brazil's economy from high taxes and red tape.

"This doesn't solve the problem," said Mauricio Rosal, chief economist at Raymond James in Sao Paulo. Long-term, he added, "this does nothing to address the problems of competitiveness."

Fernando Marques, owner of a local pharmaceutical company, União Química, urged the government to do more.

"The government still needs to tackle the real problems hurting industry," he said. "We need tax reform."

Long-pending tax, judicial and pension reforms are among the many big overhauls economists say Brazil needs to free up investment and make the economy more efficient.

In a study released Tuesday, Fitch Ratings said the country remains more attractive to investment than it did in decades past but that further progress remains elusive without "a reduction in cost of doing business."

INDUSTRY RECOVERY NOT CLOSE

Government figures on Tuesday showed that industrial output in February recovered most of its lost ground from a sharp drop in January, when Brazil's overvalued currency and economic ills abroad continued to erode the competitiveness of manufacturers.

Industrial production rose a better-than-expected 1.3 percent in February, the best monthly growth rate in a year. In January, industrial output contracted a revised 1.5 percent, less than a previous estimate of a 2.1 percent decline.

Despite the snap back in February, analysts cautioned it is too early to say that a genuine recovery is underway. A weak industrial sector was one of the main culprits for disappointing economic growth in 2011.

"We can't say industry is recovering.," said Thiago Carlos, an economist at Link Investimentos in Sao Paulo. "It's still weak and it keeps suffering from problems of competitiveness, and there is no real improvement on the horizon."

(Additional reporting by Tiago Pariz, Ana Flor and Jeferson Ribeiro; Writing by Paulo Prada; Editing by Todd Benson and Padraic Cassidy)