December 1, 2011 9:59 pm

Brazil cuts tax on fridges to boost economy

Brazilians looking to upgrade to flat-screen televisions and new refrigerators received a boost as the government slashed taxes on household appliances in a bid to revitalise the country’s flagging economy.

Foreign investors will also cheer the reduction in taxes on inflows announced as part of a package of tax cuts reminiscent of measures the government took during the 2008 crisis.

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Finance minister Guido Mantega on Thursday swore to defend economic growth in Brazil against “contamination” from the global crisis.

“We have the conditions here in Brazil to take the necessary measures so that the Brazilian economy continues to grow, so that consumption in Brazil – one of the strengths that distinguishes us from other countries – continues to be strong and dynamic,” Mr Mantega said.

The moves come as emerging markets led by China have begun easing monetary and fiscal policy in earnest to head off economic weakness stemming from the crisis in the eurozone.

Brazil’s central bank on Wednesday night cut interest rates by 50 basis points for the third time since August, reducing the benchmark Selic rate to 11 per cent on the back of the bearish international outlook.

In the package of tax cuts, Mr Mantega said the government planned to eliminate the financial transactions tax – known as the “IOF” - of 2 per cent on foreign purchases of Brazilian stocks and another on foreign purchases of corporate bonds with maturities of over four years.

He also said there would be a reduction of the IOF on personal credit to 2.5 per cent from 3 per cent a year and a reduction of the government`s industrialised products tax on home appliances including fridges, stoves, freezers and washing machines.

There would also be a 3 per cent tax rebate for exporters of industrialised products and the elimination of a tax on pastas, flour and bread.

But the government did not eliminate an IOF on foreign purchases of shorter term corporate bonds, which is blamed for quelling intense foreign interest in that market.

Brazil’s benchmark Bovespa equity index rose 1.8 per cent on the news on Thursday morning while the real strengthened 0.9 per cent to R$1.7927 to the dollar.

But economists said the measures, while a step in the right direction, were not enough, particularly if the European economy continues to dive. The total package amounts to about R$1bn in tax cuts, Mr Mantega said.

“It [the package] has already sparked a rally here and the Bovespa’s off to a good start on the day but having said, that given the global context in which it has taken place, it`s unlikely to trigger massive inflows at this point,” said Nick Chamie, head of emerging markets research at RBC Capital Markets in Toronto.

Economists believe the Brazilian economy is set to slow to about 3 per cent this year compared with 7.5 per cent in 2010. But the government remains considerably more optimistic for next year.

“We have [the means] to resist this external contamination,” Mr Mantega told reporters. “We are preparing ourselves for growth in 2012 to return to 5 per cent, this is our goal.”

Economists said while Thursday’s package was insufficient, the government retained plenty of firepower to further stimulate the economy through tax breaks or interest rate cuts.

But even then, it would struggle to meet its targets for next year, said UK-based research house, Capital Economics.

“There remains plenty of room for further policy stimulus but against the backdrop of a rapidly deteriorating global economy, the government’s target of 5 per cent growth next year looks ambitious to say the least.”

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