MercoPress. South Atlantic News Agency

Brazil announces measures to boost sales of vehicles and stimulate growth

In exchange for tax breaks auto manufacturers pledged to cut prices as much as 10%, said Mantega

Brazil lowered taxes on consumer borrowing and created incentives for banks to boost vehicle lending as policy makers struggle to revive economic growth in the Latin America’s largest market.

As part of a stimulus package announced on Monday, the central bank will reduce reserve requirements so lenders can boost credit for car purchases. Taxes on vehicles will also fall while the state development bank channels more subsidized funding to companies that invest in equipment. The measures will cost the government 2.7 billion Reais (1.3 billion dollars) between now and Aug. 31, when most of the measures expire.

“We are facing an escalation of the international crisis,” Finance Minister Guido Mantega told reporters in Brasilia. “This demands that we redouble our efforts to maintain economic growth at a reasonable rate.”

Brazil’s economic expansion faltered in the first quarter even as the government cut borrowing costs to near record lows, reduced taxes on home appliances and boosted subsidized credit. Economists have been cutting their forecast for growth this year, after activity unexpectedly contracted in March.

In exchange for the tax breaks, automakers pledged to cut prices by as much as 10% and avoid layoffs, Mantega said.

Vehicle sales fell 11% in April from a year ago, according to the National Federation of Automotive Vehicle Distributors, Fenabrave. While sales of cars rebounded 5% in the first 15 days of May, sales of heavy trucks and buses plunged 28%. Fenabrave this month lowered to 3.5% its forecast for sales growth this year compared with an estimate of 5.8% in January.

Robust demand that led to record sales last year of 3.8 million vehicles had been buoying automakers even as a 24% rally in the currency between the end of 2008 and start of this year fuelled a surge in imported cars from China, Mexico and South Korea.

Still, with the economy slowing, consumers are being more cautious and banks are restricting credit for car purchases as bad loans mount. The default rate on auto loans rose for the 15th straight month in March to 5.7% from 3% a year earlier, according to the central bank.

Cheaper credit and longer maturities will help reverse the declining credit performance, Mantega said on Monday.

Daimler AG ordered a mandatory nine-day furlough in April for workers at its Mercedes-Benz truck factory outside Sao Paulo, and Ford Motor Co. and Volkswagen AG are also slowing their assembly lines in Brazil, as stockpiles of unsold vehicles increase.

Brazil’s auto industry is the world’s third largest and responsible for 20% of the country’s industrial economy, Mantega told reporters in Brasilia.

Brazil’s seasonally adjusted economic activity index, a proxy GDP fell 0.35% in March, after dropping in January and February the central bank said May 18.

Analysts expect GDP to expand 3.09% in 2012, compared with 3.20% a week earlier, according to the median estimate in a central bank survey published Monday.

Mantega said GDP growth this year will be higher than the 2.7% expansion in 2011, adding the economy will expand at a 4.5% annual pace in the second half.

“I can assure you that we are 100%, 200%, 300% prepared” to counter the effects of a worsening global crisis, President Dilma Rousseff said on Monday at an event in the southern state of Santa Catarina.